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Bulls Regaining Their Chocolate Craving

Cocoa futures are starting to rise again after a nearly month-long sell-off in August saw prices fall by over $300 per ton. Continued wet weather in the West African growing regions has made conditions ideal for the spread of Black Pod disease, a fungus that spreads quickly on Cocoa pods during periods of excessive rains and humidity and lack of sunshine. Growers in Ghana have reported more cases of the disease recently, and analysts are starting to figure in lower crop prospects for 2007-08 due to the mediocre weather conditions so far this season. In addition, continued civil unrest in Cameroon has hurt the Cocoa market in that country, which is also supporting the bullish case. Though speculative accounts are already holding long positions in the Cocoa market, the size of the net-long position is not as large as it was during the highs made in July, which may signal additional fresh buying entering the Cocoa market should the recent rally continue.

Looking at the daily chart for December Cocoa, we notice prices moving above the 50-day moving average in early trade. This appears to have sparked additional momentum buying and triggered buy stops above the $1907 resistance level. In fact, prices are now trying to test the 100-day moving average at $1940 – a close above this key indicator could shift momentum further into the bullish camp. However, the 14-day RSI has moved into overbought territory with a reading of 79.17. The next major resistance point is seen at the July 31st highs of $1982, with support at the 20-day moving average of $1830. In early trade, December Cocoa is trading at $1938, up $38.

Mike Zarembski, Senior Commodity Analyst