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Ratios charts can show many interesting aspects. They can reveal, for example, supports and resistances where there is a high probability of reversal. One such situation can be seen now in the coffee/sugar ratio.
It is clear from the chart that the ratio value has once again reached the blue resistance line. Every time coffee/sugar has exceeded 13, often reaching 14 (or slightly above), it has then started to fall.
How can this situation be exploited? Firstly, if the ratio rises, it means that the coffee is gaining value over the sugar. Then, it is possible to exploit the fact that the highs of the ratio correspond to the highs of the Intermarket KC-SB spread and, therefore, there is a fair chance of a future decline in the spread.
I now show you the KCN22-SBN22 spread constructed by buying the coffee futures contract with delivery in July 2022 and selling the sugar futures contract with delivery also in July 2022. Below is the chart with the two seasonal patterns at 5- and 15-year.
Since November, the seasonality has been bearish, as shown by the two seasonal patterns, while the spread has been moving in the opposite direction, as the ratio chart anticipated.
Below, you can see the continuous histogram.
The high level of the ratio, which has reached the blue resistance line at 14, corresponds to a level of extreme contango in the KCN22-SBN22 spread. It is therefore conceivable that the contango will return in the coming weeks/months in the red area, the one with the highest columns that acts as a price "magnet". The spread, therefore, is to be sold.
Below, the Seasonality by month chart.
For what it may be worth in times of strong speculation such as the current coffee period, the spread has been bearish in March 4 out of 5 years and 11 out of the last 15.
Coffee has been heavily speculated for months, which has led it to exceed $260 (only in 2011 had it reached and exceeded such a high price) and the more weeks go by, the greater the likelihood of a price reversal. Sugar, on the other hand, seems to have stopped its descent in the $18 area and is now ready to go back up, with the first target being the $19.60 area. Thus, a strengthening of sugar against coffee is the most likely scenario.
In this regard, I show you the latest chart with the Hedgers' net position above and the coffee chart below.
You can see that the same situation as in 2011 is repeating itself with a bullish "divergence" (price and net position both rising).
In conclusion, KCN22-SBN22 is a very interesting spread that is at extreme levels and a future return to a more correct price is highly probable. The coffee/sugar ratio chart shows how this type of situation has been a good trading opportunity in the past. The only difficulty: choosing the right entry timing.
Ratios charts can show many interesting aspects. They can reveal, for example, supports and resistances where there is a high probability of reversal. One such situation can be seen now in the
I am a macroeconomic and financial analyst with over 30 years’ experience, including two years as a fund manager. I specialise in currencies and commodities, and I am the author of several successful books on trading, macroeconomics, and financial markets.
2 Comments
Una pregunta de novato: ya que la volatilidad del cafe es casi seis veces la del azucar, seria recomendable para este combo vender 1 contrato de cafe y comprar 6 de azucar para igualar volatilidades?
Dobrý den,
ty násobky ceny jsou kvůli “vyvážení ” spraedu? Lze takový kontrakt uskutečnit v InteractiveBrokers?
Zřejmě by se muselo zadat KCN22-3xSBN22? Je to vhodné pro malé účty? (do 20.000dolarů).
Díky za info