Coffee Arabica May Be Over-Roasted

The headlines in the world of coffee production have been pretty startling recently: warehouses are overflowing with coffee beans in Brazil, consumers haven't been consuming as much coffee because coffee shops are not fully reopened and consequently, the coffee market last week saw its worst trading week in 22 years.

So, how bad are those clouds in your coffee and what are they telling you? Perhaps that the market has overreacted.

If you want to look at fundamentals, perhaps the best place to go right now is to Starbucks - one of the largest coffee purveyors in the world. At a J.P. Morgan investor conference last week, the company spoke about the rebound in its business (currently only 3% of its stores are closed and many of those are in cities where the company already has a big presence. In the U.S., its comparable same-store sales went from -14% in July to -11% in August. In China, one of its biggest growth markets, those comps went from -10% in July to flat in August. People aren't sitting in the stores to sip their cup of Joe but they are getting their takeout.

At Excalibur Pro, one of the momentum tools we like to use is the Markov Process - and that is showing more bearishness right now in Coffee Arabica. But the question is how short-term that may be: The current prices has dropped significantly below the 50-day and 200-day moving averages. And the Relative Strength Index reading of 31 is just one point above the "oversold" signal that RSI sends when you drop below 30.

If you believe coffee stands to move higher and are looking for a way to double-espresso that bet, consider the Brazilian Real. The Real and coffee are usually highly correlated and recently have not been (the 5-day average is a meager .33 correlation, which means little relationship right now,)