Correction or a Crash?

Last month’s article indicated that there were some warning signs that the bull market may see its demise sooner than longs would care to admit and that these indicators should be respected; caution was advised.  The coffee market has since pulled back more than 30 cents a pound or a 10% correction.  How does one distinguish between when a correction is just a pause in the longstanding bull run and the market will eventually turn back up and rally into new high territory or when the pull back is really the beginning of the end and the market is in for a long slippery slope downward?   For coffee, the jury is still out and until the frost season is over and the Brazilian 2012-13 crop has blossomed, it will be impossible to say for sure that the bull market has finally come to a decisive end after more than five years of higher highs and higher lows.   Market corrections can sometimes be steep, depending on the timing of the move, influence of outside markets, and how technically overbought the market had become on advance, which is usually indicated by the net speculative long position and its liquidation.
For coffee, the spot shortages that drove the market successively higher have been temporarily alleviated. The market is headed into what is normally a seasonally weak period with influx of coffee from the Brazilian harvest even though the weather in Brazil has potential to be menacing.  The market generally makes a seasonal low in late July or August.  There is still a risk though for the situation to become tighter again as the season drags on due to a smaller Colombian secondary harvest and many producers having already sold much of their crops to take advantage of the higher prices. Coffee started to flow to the NY Board as cash market differentials weakened, but this may not persist for too long with signs already that on the price drop, premiums have started to firm back up. Producer stocks are limited and while consumer stocks have edged upwards of late, would be insufficient to cover yet another production shortfall. Therein lies the key to the market: it would take another supply shock to turn the momentum back up.  Worries about future shortages are already built into current market levels. Bull markets need to be continually fed fresh news to sustain the rise and of late there simply haven’t been enough new developments to keep the rally in force.