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April 29, 2015, 10:32 a.m. EDT

Put down that cup, it's time to short coffee

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About James Cordier

James Cordier is founder and head portfolio manager of OptionSellers.com, where he has managed assets for a global client base since 1999. He is regularly quoted by national financial media including the Wall Street Journal, Barrons, Forbes, CNN Money and Dow Jones Newswires. He is a regular guest analyst on CNBC, Bloomberg Television and Fox Business News. In 2014, James launched his 3rd edition of The Complete Guide To Option Selling, published by McGraw-Hill. For more information, visit OptionSellers.com.

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If we look at price ranges for coffee during those years and assume no major weather disruptions, a clearer picture of "normal" price ranges for coffee this year emerges.

In 2007, coffee prices traded between 1.00 and 1.40 per pound. In 2013, prices gyrated between 1.01 and 1.58 per pound.

Given this year's slightly lower stocks-to-usage vs. those years, OptionSellers.com projects 2015 (May-December) coffee prices to range between 1.65 and 1.05 per pound . That may not help futures traders much, but for option sellers, that should work just fine.

Seasonal outlook

As we know from other agricultural markets, it is not uncommon for prices to make lows during or immediately following harvest, as this is when supplies are highest.

September coffee seasonal

The Brazilian harvest traditionally begins in May and lasts for several months. A seasonal chart (above) confirms that this phenomenon tends to hold true for coffee prices as well. While coffee prices have already fallen to lower levels this spring (perhaps as a result of early harvest beginning in some growing regions in April), prices will battle harvest pressure for at least the next 60-90 days until cooler weather arrives in earnest later in July or August. This should help to cap upside rallies and could feed another leg lower should current support break.

Conclusion and strategy

Coffee prices are currently oversold and could be due for a recovery bounce to the upside.

However, with the 2014 weather scare over, adequate global ending stocks and Brazilian harvest ramping up into full swing this month, expect any rallies in coffee to be limited for at least the next 90 days — when the market begins to turn its focus to 2016.

While we, of course, will be looking to apply option-writing strategies in this market, futures traders can view a rally back to the 1.55-1.65 level (basis the September contract) as opportunities to begin building short positions. Risk to a break above 1.70.

We'll be positioning client portfolios in this market over the next several weeks as opportunities present themselves.

Fundamental charts courtesy The Hightower Report

Seasonal Chart Courtesy of Moore Research Center, Inc.

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