Coffee ETNs Could Face Technical Headwinds
April 22nd at 9:00am by Tom Lydon
The iPath Dow Jones-UBS Coffee Total Return Sub-Index ETN (NYSEArca: JO) fell 1.6% Monday on light volume, which is no big deal in the volatile world of coffee futures.
JO is still up 80% this year, making it the top-performing non-leveraged exchange traded product. So strong have coffee futures been that the iPath Pure Beta Coffee ETN (NYSEArca: CAFÉ) is considered a laggard relative to JO with a 74% year-to-date gain. [Brazil Weather a Boon for Coffee ETNs]
Coffee’s transition from hated asset class to star performer has been stunning, but the charts indicate, the commodity could be ready to take a break.
“Looking at the daily chart for July Coffee, we notice what appears to be a double-top formation which gained some credence after the sharp price decline seen on Tuesday,” according to OptionsExpress. “There also appears to be a bearish divergence forming in the 14-day RSI. In order to confirm this bearish technical pattern we would need to see prices close below the 20-day moving average (currently near the 187.20 price level), and more importantly, see prices close on a weekly basis below recent lows at 167.95. A weekly close above 211.50 would invalidate the technical formation.”
Looking JO, the ETN resides comfortably above its important moving averages. The ETN is 6% above its 20-day line and almost 10% above 50-day moving average. JO is also a whopping 48% above its 200-day line, which could imply coffee futures are overbought at current levels. Coffee’s fundamental outlook, however, remains solid.
“The catalyst for this turnaround was Mother Nature and her wrath towards the Coffee growing regions of Brazil. Drought conditions plagued the developing Coffee crop this season, causing irreversible damage early in the development stage. Analysts are now lowering their estimates for the size of the Brazilian crop from 60 million bags earlier in the season to as low as 45 million bags in the more pessimistic outlooks,” according to OptionsExpress.
Interestingly, many investors have missed out on JO’s surge. As of April 16, nearly $97 million had been pulled from the ETN this year and JO lost assets despite surging in February. [Despite Rally, Investors Ditch Coffee ETNs]
iPath Dow Jones-UBS Coffee Total Return Sub-Index ETN
ETF Trends editorial team contributed to this post.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.