Arabica/Robusta Coffee Spread: Trade Signal Triggered

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).

March Arabica Coffee Robusta Coffee Spread Daily

March Arabica Coffee Robusta Coffee Spread Daily

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.

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