Over the past year coffee has been the commodity of choice amongst investors. In an earlier article, we mentioned that coffee prices rose 85% since the start of the year and that they were nearing an influential level of resistance. Since mid-April short-term selling pressure has dominated the spot futures and the resistance levels in fact have driven the price down toward the long-term support of its 200-day moving average. As you can see from the chart below, the futures price of coffee has notched a new short-term low at $1.65 and recent buying pressure near this influential support level suggests that the uptrend is about to resume. (For related reading, see: For Traders, Coffee Is The Other Black Gold.)

As you can see from the chart below, the MACD indicator has recently crossed above its signal line. This technical buy signal suggests that the momentum is in favor of the bulls and that a move toward the swing high of $2.19 is likely in the making. Since traders are expecting a rise in coffee prices over the coming few months, it's only practical to examine how this will impact major coffee producers and companies that use coffee as a significant input.

Rising Prices and Consumers

In general, traders are often happy to see technical buy signals that suggest prices over an asset are likely to increase over the coming weeks. But the consumer perspective is not so welcoming. Higher prices of coffee suggest that companies like Starbucks Corp. (SBUX) will need to pay more for their primary inputs and will likely pass these costs on to the consumer. For investors, this works as a Catch 22; higher prices can often lead to higher profits, but can also mean lower consumption and reduced profit. Based on the recent price action, the strong move above the 200-day moving average suggests that higher coffee prices will work in favor of Starbucks over the short term, and as a result, the near-term price target would be near the high of $81.76. (For more, check out: A Look At Corporate Profit Margins.)

Inelastic Demand Means Higher Share Prices

Since the "daily grind" is such a habit for so many people, it also means that the demand for the underlying commodity is considered to be inelastic. This means that supply and demand is generally unaffected despite price changes. It would take a significant price increase to take hold before the average consumer changes their morning coffee habit. Given the strong fundamentals, Keurig Green Mountain Inc. (GMCR) seems to be perfectly positioned. As many of you know, GMCR is the $20 billion business behind the K-Cup and the Green Mountain Brand. As you can see from the chart below, the strong demand for the shares over the past few months combined with rising prices of the underlying commodity suggest that this stock could be poised to head higher over the coming months.

The Bottom Line

The spot price of coffee has been under pressure recently. However, strong support from the 200-day moving average and the recent bounce off this level suggests that coffee prices are headed higher. It wouldn’t be surprising to see prominent companies such as Starbucks and Green Mountain pass these price increases along to the consumer. Based on the charts above, traders will likely be looking to enter a positron and protect themselves from losses by placing their stop-loss orders below long term support levels identified by the red lines. (For further reading, see: A Primer On The MACD.)

Related Articles
  1. Chart Advisor

    3 Ways to Trade the Rising Volatility

    With volatility increasing in the markets, many are turning to these three volatility-capturing exchange-traded products.
  2. Chart Advisor

    Big Double Top Patterns On the Verge of Breaking

    These stocks have created big double top chart patterns, and are on the verge of breaking the patterns to the downside--a bearish signal.
  3. Options & Futures

    Analyzing The 5 Most Liquid Commodity Futures

    Crude oil leads the pack as the most liquid commodity futures market, followed by corn and natural gas.
  4. Chart Advisor

    Gold Struggles to Climb Higher and May Fall Soon

    Traders will be watching the price of gold over the coming weeks. We'll take a look at how a couple major moving averages are suggesting that the next move could be lower.
  5. Technical Indicators

    Use Market Volume Data to Determine a Bottom

    Market bottoms often carve out classic volume patterns that let observant traders make fast and accurate calls.
  6. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
  7. Trading Strategies

    Who Actually Trades or Invests In Penny Stocks?

    Although penny stocks are highly speculative, millions of people trade them daily. Here are 10 different types who do.
  8. Chart Advisor

    4 Stocks Still Flashing Buy Signals

    In the midst of volatility and a big market sell-off last week, these stocks are flashing buy signals.
  9. Technical Indicators

    Understanding Trend Analysis

    Trend analysis is the use of past performance to predict future price movement of a security.
  10. Trading Strategies

    How To Buy Penny Stocks (While Avoiding Scammers)

    Penny stocks are risky business. If want to trade in them, here's how to preserve your trading capital and even score the occasional winner.
RELATED TERMS
  1. Fintech

    Fintech is a portmanteau of financial technology that describes ...
  2. Indicator

    Indicators are statistics used to measure current conditions ...
  3. Intraday Momentum Index (IMI)

    A technical indicator that combines aspects of candlestick analysis ...
  4. Benchmark Crude Oil

    Benchmark crude oil is crude oil that serves as a pricing reference, ...
  5. Christmas tree (oil and gas)

    A vertical assembly of mechanical elements used in oil exploration ...
  6. FPSO (Floating Production Storage ...

    Acronym for Floating Production Storage and Offloading. FPSO ...
RELATED FAQS
  1. Tame Panic Selling with the Exhausted Selling Model

    The exhausted selling model is a pricing strategy used to identify and trade based off of the price floor of a security. ... Read Full Answer >>
  2. Point and Figure Charting Using Count Analysis

    Count analysis is a means of interpreting point and figure charts to measure vertical price movements. Technical analysts ... Read Full Answer >>
  3. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
  4. How are double exponential moving averages applied in technical analysis?

    Double exponential moving averages (DEMAS) are commonly used in technical analysis like any other moving average indicator ... Read Full Answer >>
  5. How do you know where on the oscillator you should make a purchase or sale?

    Common oscillator readings to consider making a buy or sale are below 20 or above 80, respectively. More aggressive investors ... Read Full Answer >>
  6. What are the alert zones in a Fibonacci retracement?

    The most commonly used Fibonacci retracement alert levels are at 38.2% and 61.8%. A 50% retracement level is also commonly ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!