Arabica Coffee/Robusta Coffee Spread
Yesterday we did a post on the spread between the Arabica coffee and Robusta coffee. Although the spread is historically expensive, we noted that previous excursions to these heights have often seen a continued surge several thousand dollars higher before the final peak and reversal occurred. Therefore, we advocated the idea of using a reversal system to jump in either way.
We hit the ground running as the downside parameters for a short sale was triggered at today’s close. Boy, that was quick! The blog initiated a hypothetical trade to sell one 37,500 lb. March Arabica coffee contract at 203.50 (contract value of $76,312.50) and simultaneously buy four of the 10-tonne March Robusta coffee contracts at 2069 (contract value of $20,690 each or $82,760). This puts the short spread position on at a net price of -$6,447.50 (premium the sum of the Robusta contracts).
Initially, the exit strategy is to liquidate the short March Arabica coffee/Robusta coffee (x4) spread position on a close above -$2k (premium Robusta). Also, a close above -$2k will trigger a buy signal to initiate a long spread position. This is because the reversal system always has a position in the market, switching back and forth from long to short if the parameters are elected. Closes above -$2k trigger the buy signals and closes below -$6k trigger the sell signals.
At the moment, it appears that an ominous-looking double top is forming on the daily timeframe between the early March and mid-October highs. If so, a return to last year’s low of -$22k is possible.
Conversely, a breakout to new contract highs from here would destroy the double top pattern. This could send the March Arabica coffee/Robusta coffee (x4) spread skyrocketing above +$10k (premium Arabica) like we’ve seen in the past. Either way, a sizable move could be underway.