Traders warming up to hot chocolate
Cocoa futures have made impressive gains the past several sessions, after breaking out from a 5-plus week long consolidation pattern. Increasing concerns about the spread of black pod disease has sparked traders’ interest in Cocoa, with the main crop of the Ivory Coast now feared to have been afflicted. If the disease does become widespread, this could seriously undermine the potential surplus expected for the 2007-08 marketing year. Following a global Cocoa deficit for the 2006-07 season, a bumper crop was anticipated this year to help offset tight supplies and higher world prices -- especially for high quality Cocoa. A weaker U.S. Dollar is also supportive to Cocoa futures prices in New York, as arbitrage traders buy New York Cocoa futures vs. the London market. However, with prices now well past the $2000 per ton level, if the spread of black pod turns out to be minor, prices could be in for a steep drop as speculators rush for the exits.
Looking at the daily chart for December Cocoa, we notice prices trading well above the major moving averages, as well as the 20-day moving average starting to move above the 50-day average. This bullish sign signals that short-term momentum favors Cocoa bulls. However the 14-day RSI has moved well into overbought territory with a reading of 81.63. Trade may turn volatile this morning, as large traders position themselves for the start of the fourth quarter. The next resistance point for December Cocoa is seen at $2054, with support found at the week’s low of $1973. In early trade, December Cocoa is trading at $2040, up $9.
Mike Zarembski Senior Commodity Analyst
