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"Run OJ! Run!"

07/06/04 08:41:41 AM
by David Penn

Was that merely the legendary exhortation to a fleeing celebrity accused of a double homicide? Or the cry of jubilant orange juice futures bulls? We chart. You decide.

Security:   JOU4
Position:   N/A

In recent months in articles for Advantage, I've introduced the "buy breakfast" theory on commodity bullishness. A theory I first heard suggested by international money manager Marc Faber of the Gloom Boom Doom Report, the bottom line of this idea is that "breakfast" commodities such as coffee, sugar and orange juice may have been late-comers to the broad-based bull market in commodities that has been going on for the past few years (depending on the commodity), but that their time will come. Much of Faber's reasoning is based on his perceptions of economic growth in Asia, especially in China, where he believes that rising levels of consumption of "breakfast commodities" will serve to support bull markets in these groups.

The price behavior of both coffee and sugar in recent months seems to be bearing this out. When I last wrote about coffee ("Is Coffee Percolating Higher?" April 16, 2004), I suggested that a bottom might be developing near the area of the first quarter lows. From that point, coffee rallied from 72 cents per pound to over 88 cents -- before collapsing over the course of June back to the 72 cent level (basis September futures). About a week after my coffee article was posted at Advantage, I wrote a piece for on sugar ("Sugar, Sugar," April 21, 2004) asking whether or not this commodity had "finally joined. . . the bull market." At the time of that article, sugar futures were trading in a mid-April range between 6.50 cents and 6.75 cents (basis May). Since that time, sugar futures have soared to the upside. Basis October, where the mid-April range would have been between approximately 7.20 cents to 7.35 cents, sugar futures have moved to a recent close of 7.96 cents.

Graphic provided by: Prophet Financial Systems, Inc.
So with coffee and sugar off to the races, how is orange juice -- the last member of the "buy breakfast" triumvirate -- coming along? Well, if you were any one of those traders making easy money off the seemingly endless bear market in orange juice futures, the one word answer might be: squeeze.

Whether or not the June rally in September orange juice is merely a short squeeze or the beginning of a bull market, there can be little doubt that the sudden rally took both sides of the trade by surprise. There has been no commodity as bear-ridden as orange juice, which has been in a bear market for almost 15 years since its peak in 1990 at just over $2 ("200 cents") a pound. As of June 22, when September OJ was just breaking above its 50-day exponential moving average, the Commitment of Traders report showed that traders were significantly short; while "non-commercials" were more or less even, "commercials" -- typically representing the "smart money" were overwhelmingly short: 27,316 short contracts compared to 16,010 longs. If the move up in June proves to be sustainable, then it will have been the "non-reportable," so-called little traders, who will be vindicated, as that cohort was even more long going into June 22nd than the commercials were short -- with "non-reportable" positions being 14,136 long compared to 2,701 short.

In any event, what to make of orange juice now? The sharpness of the June rally begs a correction -- as does the long top tail on the most recent price candlestick. If this move represents a first leg up in a new bull market, then there is the possibility that a deep Wave 2-type correction will send September orange juice back toward a test of the lows just above 56 cents. Short of that, a test of support on the 20- and 50-day exponential averages seems like a reasonable place for September orange juice to catch its breath before another run higher.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine,, and Advantage.

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