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Cocoa has edged lower in the early overnight trade with a weak Pound adding to the selling bias that was firmly in place last week. May cocoa has been swept sharply lower from the January high by heavy liquidation pressure tied to a shift in the fundamental outlook, bearish currency influences and a harsh political regulatory environment which could keep the bear camp in control a bit longer. With May cocoa closing under the December low and below the 100 day moving average for the first time since June 2009, downside price risk remains in place. A retreat back to $3,143 can’t be ruled out if May cocoa fails to hold support at $3,200. With the highs in December and January looking more like a quasi double top, May cocoa’s close under the 100 day moving average may be pointing to a broader bearish technical setup. Cocoa fell last Friday despite 4th quarter US GDP growing at the fastest pace in over six years which could have raised optimism for a recovery in chocolate demand. Instead, cocoa still looks to be under pressure from the weak North American grind which fell 1.5% last quarter and is a clear indication that general US economic strength didn’t provide a demand boost in the US cocoa sector. Heavy selling in cocoa has also been inspired by the bearish currency action with the Dollar Index rising to a 5 month high last week. A stronger dollar diminishes the appeal of cocoa as an alternative investment. Macro economic uncertainty following China’s steps to tighten bank credit and the slide in US equities also has investors scaling back risk and this has been sharply felt in the cocoa market. The January 26th COT report with options for cocoa showed the combined fund and spec net long position at 48,460 contracts as of early last week, but this reading is certainly overstated since the market has fallen by nearly $180 per tonne since the report was measured. We still suspect part of the selling in cocoa has been tied to the sovereign debt problems facing Europe and the UK which could undermine growth prospects and demand in key chocolate consuming markets. Although Ivory Coast cocoa bean arrivals to ports are expected to trail off this month, supply side issues so far haven’t provided any price support.
TODAY’S GUIDANCE: It’s clear from the price action that traders are recalculating a weaker demand outlook in the fundamental setup for cocoa and that could pull May cocoa back to the November low unless macro economic optimism can be revived or a bullish supply side catalyst surfaces.
TODAY’S MARKET IDEAS: The price action in May cocoa continues to favor the bear camp and the close under the 100 day moving average (the first time since June 2009) may be signaling a more significant change in the market’s technical pattern. Overhead resistance is at $3,283 then $3,330. If May cocoa fails to hold support at $3,200 the next target will be $3,143.
Cocoa Market Commentary – 2010.02.01
by Terry Roggensack on February 1, 2010
Below is a sample of our Daily Commentary. To get this comment, and our daily coverage of 15 additional markets and trade ideas, visit futures-research.com for your free 2 week trial!
Cocoa has edged lower in the early overnight trade with a weak Pound adding to the selling bias that was firmly in place last week. May cocoa has been swept sharply lower from the January high by heavy liquidation pressure tied to a shift in the fundamental outlook, bearish currency influences and a harsh political regulatory environment which could keep the bear camp in control a bit longer. With May cocoa closing under the December low and below the 100 day moving average for the first time since June 2009, downside price risk remains in place. A retreat back to $3,143 can’t be ruled out if May cocoa fails to hold support at $3,200. With the highs in December and January looking more like a quasi double top, May cocoa’s close under the 100 day moving average may be pointing to a broader bearish technical setup. Cocoa fell last Friday despite 4th quarter US GDP growing at the fastest pace in over six years which could have raised optimism for a recovery in chocolate demand. Instead, cocoa still looks to be under pressure from the weak North American grind which fell 1.5% last quarter and is a clear indication that general US economic strength didn’t provide a demand boost in the US cocoa sector. Heavy selling in cocoa has also been inspired by the bearish currency action with the Dollar Index rising to a 5 month high last week. A stronger dollar diminishes the appeal of cocoa as an alternative investment. Macro economic uncertainty following China’s steps to tighten bank credit and the slide in US equities also has investors scaling back risk and this has been sharply felt in the cocoa market. The January 26th COT report with options for cocoa showed the combined fund and spec net long position at 48,460 contracts as of early last week, but this reading is certainly overstated since the market has fallen by nearly $180 per tonne since the report was measured. We still suspect part of the selling in cocoa has been tied to the sovereign debt problems facing Europe and the UK which could undermine growth prospects and demand in key chocolate consuming markets. Although Ivory Coast cocoa bean arrivals to ports are expected to trail off this month, supply side issues so far haven’t provided any price support.
TODAY’S GUIDANCE: It’s clear from the price action that traders are recalculating a weaker demand outlook in the fundamental setup for cocoa and that could pull May cocoa back to the November low unless macro economic optimism can be revived or a bullish supply side catalyst surfaces.
TODAY’S MARKET IDEAS: The price action in May cocoa continues to favor the bear camp and the close under the 100 day moving average (the first time since June 2009) may be signaling a more significant change in the market’s technical pattern. Overhead resistance is at $3,283 then $3,330. If May cocoa fails to hold support at $3,200 the next target will be $3,143.
Tags: Cocoa, Softs
About Terry Roggensack