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(March 7, 2002) COFFEE: A combination of buy stops and local buying sent coffee to a new near term high as it continues its mini rally. The chart looks good, but traders remain skeptical of the ability of the market to actually hold gains, considering the available supply of coffee.

On the fundamental front, Vietnam, the number two producer of coffee, is planning to cut production to 600,000 tonnes for the near term. A production cut is what this market has needed for ages, not half-baked schemes to keep existing coffee off the market all the while continuing to produce like it's all OK. Unfortunately, traders just see that as a huge supply hanging over the market.

The chart still opens up the potential for a double bottom in the making. Taking out 5130 and closing above it will imply a low. The problem with coffee is the one that has been plaguing it for some time now: too much coffee. Perhaps Vietnam's move to cut production will be followed by other producers. Otherwise, if we are to see a move of consequence, it is likely going to be due to a weather problem by a large producer such as Brazil or the funds shifting out of short positions. With that in mind, if you find that you are watching coffee with an eye to calling a bottom, consider the July calls, which are relatively inexpensive.

A concern I have over the potential for coffee to put in a low comes from the point that I see plenty of smaller traders doing some bottom fishing, but the large traders seem to be content to sell into the rallies. This is not positive if one is a bull.

M. Steven Morgan

www.commodityreview.com

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