Coffee Producers and Commercials have been extremely long throughout most of 2018. What historically has been a reliable indicator to position long with 70 percentile moves 20 days forward of 5:2 in bulls favor, has seen the complete opposite this year with prices posting odds of 1: 3.5 in bears favor 20 days forward - i.e. bearish trend followers have been paid, and they are continuing to do what works.
We have seen similar action in Gold/Silver/Sugar with Commercials on the losing end, while positioned heavily long.
This is the nature of odds and statistical distribution however - When we flip a coin with 50/50 odds hundreds or thousands of times you will encounter streaks of 10 or 20 or more consecutive Heads or Tails outcomes, before action reverts and the probabilities exert their influence.
If we are in one of these streaks, where Heads has turned up 15 times in a row, does that impact the odds of the next flip? Absolutely not, odds are still 50/50, and this is the way we need to approach it - 1 statistical distribution at a time.
Now back to Coffee, where we have a current setup of extreme Commercial/Fund positioning with 18 month Scores of 100% vs 0% respectively, which historically have paid off 5:2, but this year are losers of 1:3.5 - We are still very interested in capitalizing on this signal, but we need to filter it with some constructive technical action.
While we see Coffee in a persistent downtrend over the past 18 months, we also observe the tendency of sharp spikes and dips around the 23 day adaptive channel lines. These spikes tend to lead to mean reversion when at least 4 cents below/above the channel lines, but this is even more pronounced when the spread of price to channel line is 7 cents or more - this is exactly the condition we have today.
These dips are accompanied with oscillators reaching extreme levels, which has also led to snapback rallies.
We have Coffee traders positioned at extremes with price stretched at extremes relative to it's longer term adaptive channels. This has been a reliable indicator during this downtrend and we want to speculate long.
On Aug 20 we saw a 3.7% drop, the largest of 2018 during this 40cent/29% drop - When we see a wide ranging candle after a trend has clealry been in force, this tends to signal exhaustion as opposed to continuation. So we are using the 100.50 level as a entry pivot.
Hedge this with a 1 by .90 Oct put spread which will cost you 3 cents for 51 days protection. Take profits at the 1.08-1.10 level which should net you a gain of 8 cents with a Risk/Reward profile of 3-1.