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. Investing

    Have Commodities Bottomed?

    Commodity prices have been heading lower for more than four years, being the worst performing asset class of 2015 with more losses in cyclical commodities.
  2. Chart Advisor

    ChartAdvisor for October 2 2015

    Weekly technical summary of the major U.S. indexes.
  3. Investing

    How Diversifying Can Help You Manage Market Mayhem

    The recent market volatility, while not unexpected, has certainly been hard for any investor to digest.
  4. Investing

    The Quinoa Quandary for Bolivian Farmers

    Growing global demand for quinoa has impacted Bolivian farmers' way of life. Should the American consumer be wary of buying this product?
  5. Technical Indicators

    Why MACD Divergence Is an Unreliable Signal

    MACD divergence is a popular method for predicting reversals, but unfortunately it isn't very accurate. Learn the weaknesses of indicator divergence.
  6. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  7. Investing

    A Look at 6 Leading Female Value Investors

    In an industry still largely predominated by men, we look at 6 leading female value investors working today.
  8. Forex Fundamentals

    What Are the Best Hours to Trade the Mexican Peso?

    The best times to trade the Mexican peso are centered around economic releases, typically in the morning hours.
  9. Chart Advisor

    Expecting a Big Breakout In These 4 Stocks

    These stocks are tightly wound following big moves, and upon breakout more big moves could ensue.
  10. Chart Advisor

    Trade Base Metals With These 3 ETFs

    News out of Alcoa is causing active traders to turn toward base metals for opportunities. Before diving into the market, check out the charts of these three ETFs.
  1. What are some of the most common technical indicators that back up Doji patterns?

    The doji candlestick is important enough that Steve Nison devotes an entire chapter to it in his definitive work on candlestick ... Read Full Answer >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. 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 >>

You May Also Like

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!