Cocoa Driving Traders Cuckoo
Fundamentals
Cocoa futures have been trading in a tight range since bouncing back from mid-month lows. The market bounced after the last FOMC meeting and the resulting lower US Dollar, but whether or not Cocoa will be able to build upon this upswing in prices is still up in the air. Traders have had to weigh diminishing demand and better growing weather for the upcoming crop year versus a smaller crop size and poor bean quality. The chocolate industry has finally been forced to deal with increased Cocoa costs over the past few years, and companies have only moderately increased prices over that period of time. Manufacturers are now seeing lower demand for the end product and have had to make adjustments by reducing portion size or the amount of Cocoa in blends. Cocoa is a commodity who's demand has been resilient during past economic downturns, but we are in unchartered territory after this decade's expansion into emerging markets, which may be especially price sensitive. On the flip side, worries over the size and health of the Ivory Coast crop continue to linger. These fears have been tempered by rising stocks in Europe, which has actually helped to ease prices. Steady rains could also help ease some of the supply side fears and may have a slightly negative impact on prices. The movement of the Dollar is the wild card, with traders unsure as to the direction of the greenback. There has been some detachment from the direct inverse relationship between the value of the US currency and Cocoa prices, but given the lack of consensus opinion as to the direction of the market, the movements of the forex market could play a larger role in trading going forward.
Technicals
The May Cocoa chart appears to paint a completely different picture than the fundamentals. After jumping sharply in the third week of March, prices have been consolidating in a tight range for the last week. This typically favors the upside. Momentum has shown strong bullish divergence from prices and the RSI, which can be seen as bullish. A look deeper into the consolidation, though, shows confusion among traders. The candlesticks have formed several spinning top and hanging man days, indicating indecisiveness. This can be seen as bearish and may cause traders to tread lightly. The 50-day moving average has acted as support recently, and a breach of the average could be seen as negative for Cocoa prices.
Rob Kurzatkowski, Senior Commodity Analyst
