Wake Up and Smell the Coffee As it Brews Higher

• Posted by Greg Harmon
• on May 25th, 2011

Coffee has been in a long loose uptrend since June 2010. Along the way it has behaved quite predictably when you look at the chart of the iPath Dow Jones-AIG Coffee Total Return Sub-Index ETF (ticker: $JO).

JO

Every time it has breached the top of the Bollinger bands and the Relative Strength Index has turned it has sold off to at least the 50 day Simple Moving Average (SMA), if not lower. The turn to move higher has been marked initially by a turn in the RSI and then confirmed by a cross higher in the Moving Average Convergence Divergence (MACD) indicator. JO is turning higher now from these criteria. But a funny thing has been happening along the way. Take a look at the ratio chart below of Peet’s Coffee & Tea (ticker: $PEET) vs JO.

PEET vs JO

This chart shows that the ratio has been moving in a range bound by 0.75 and recently has moved higher to that top before falling off. As coffee rises the ratio falls and as coffee prices fall the ratio rises. Makes intuitive sense. The ratio charts for Starbucks (ticker: $SBUX) and Caribou Coffee (ticker: $CBOU) are virtually identical. But take a look at the ratio chart for Green Mountain Coffee (ticker: $GMCR) vs JO.

GMCR vs JO

This chart shows the same reaction to coffee prices, but with each of the last two earnings releases the range is being reset higher. Many have been trying to short GMCR outright and against some of the other coffee stocks. This chart proves that is the wrong trade! If you want to short GMCR then the trade should be to short it vs JO. The other coffee stocks are already showing that the building move higher in coffee is sending the coffee stocks lower. The RSI on this ratio chart shows the ratio is slightly overbought and is starting to turn lower at the same time the MACD is waning.

The move in GMCR vs JO is behind the curve from the other coffee stocks. Must be too much decaf, but leads to a better opportunity. But the short interest is high on GMCR. Pay a high price to borrow it or just realize that it does not make sense to short Green Mountain Coffee when you can get the same reaction vs coffee prices with Starbucks, Peets or Caribou Coffee Use the keys illustrated for JO above as your signals for when to exit the trade and trade it well.

As always you can see details of individual charts and more on my StockTwits feed and on chartly.)

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