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A Curious Coffee COT Report

Last week's #COT contained a curious fact: during the rally up above 200 cents the #specs actually sold rather than bought. This is contrary to what we might expect and it confirms the possibility that the lows in this #coffeemarket will be much higher than previously thought.

In the paragraphs that follow, I will provide the framework that I'm using to make this claim and then I will walk you through my logic. Please feel free to fact check me!

For those unfamiliar with the COT or Commitment of #Traders report, it is a report published by the #CFTC (Commodities and Futures Trade Commission) that states what the aggregate positions are in the market (for more information on the COT you can check out my video on the subject).


The default paradigm is that the commercial longs (#roasters) buy more when the price is low and the commercial shorts (#exporters) sell more when the price is high.


#Speculators as an aggregate take the opposite position of the commercials and rather than buy low and sell high, they tend to follow price. When prices go up they get #bullish and buy and when prices go down they get #bearish and sell. This is exemplified by the so-called #Quant, or #trend-following #funds which systematize this entire process.

When strong trends exist these trend following positions get quite high and the specs start to dominate the price action. When this happens we see the spec correlation with price get very high (up to around 90%).

(You can subscribe to my free reports if you want to see the COT and the spec correlation with price on a weekly basis).

Last Week:

Last Tuesday, prices were at a dizzying 205c and the spec position actually dropped...that is to say the specs sold. What is even more interesting here, is what it implies for the commercials. The commercial longs (roasters) added 9.5k lots.

This is interesting because Roasters buy the highs for one of two reasons:

capitulation or higher lows.


Since the roaster has an interest in buying low, the roaster will buy the highs when they have let their coverage go because they are bearish. They let their coverage go down until they can't wait any longer or become fearful and then have to buy. This is a capitulation buy and often signals a "top" to a market.

This is a plausible read of what happened after the #frost. The frost was overhyped, it came and went roasters bought on fear and are now stuck with high priced coverage.

However, there is another read as well.

Higher Lows:

The other read of the situation is that the roaster has determined that their view has changed. Since the roaster has an interest in buying the lows, this means that their view has suddenly become much more bullish.

In this new bullish paradigm, the roaster (who is well informed since they have access both to the retail consumer and to the suppliers) has determined that these new high prices are actually in the lower end of the range for their expectations.

With the prices having come off so hard from the highs, it is tempting to take the capitulation view and think that the rally is over (and perhaps it is!). However, now that the hard work is before us of actually estimating the coming Arabica crop, we must be open to the possibility that the roaster was correct to buy, that the market is still in for a long term bull market.

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