wmeubank@ocp.kcmo.com
IRA EPSTEIN & COMPANY
223 West Jackson, 7th Floor, Chicago, Illinois
(November 21, 1997) COFFEE: As many of you are aware, last month's trading in the coffee market was a very choppy affair, with the December 1997 and March 1998 contracts trading in a broad range through the end of October and then trending higher this month. While the March 1998 contract settled at 1.5245 today, this settlement only brings this market back into the trading range the expiring December contract fought to break out of! I feel one of the more notable events during this past month was the reduction in the margin requirements–to about $10,000 for the initial requirement, down almost 50 percent. I hope that this change encourages traders to once again become involved in this market.
I do not recall another period in the recent past when the coffee market seemed to be so off-balanced. In my view, this market has had to deal concurrently with strikes, late harvesting, severe weather events, and fluctuating warehouse stocks. Coffee did not react to these various events as I would have expected. It is no wonder that traders seemed to be looking elsewhere to speculate.
I think the March 1998 contract could be able to get past some of the problems experienced by the December contract. Ultimately the coffee market should return to its strong, directional moves.
How does a trader become involved?
My current chart analysis indicates that a long futures position is appropriate, but that currently the March 1998 contract is overbought. Seasonally, more Central American coffees should be coming into the market. Roasters, in particular, are eager for these new supplies, and certified warehouse stocks should start increasing again. I think all of these could help this market.
RECOMMENDATION–Short term I believe the market needs to pull back. Initially, at these levels I think you should consider buying puts. Then on pull backs, you should consider buying a March 1998 futures contract around $1.47. Risk about $2,100 or about 5½ cents. Current initial margin required is $10,000. The first objective is around $1.62.
Initial support is around $1.50, then around $1.47. Initial resistance is around $1.58, then around $1.62.
Schyler Smith
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