Will Bulls Regain Their Chocolate Cravings?
Fundamentals
Both bullish and bearish Cocoa traders had something to cheer about the past six weeks as a nearly $600 per ton rally from the May lows was followed by a quick $400 per ton decline the past several sessions. The results of these large opposing price trends may be a more subdued Cocoa market the next few weeks as traders reassess market fundamentals. One of the biggest factors in the Cocoa market is the direction of the U.S. dollar especially against the British Pound. A stronger GBP/USD is normally a bullish factor for Cocoa prices and if one compares the September Cocoa Chart to the September British Pound Chart one will note that September Cocoa began its mid-May rally at the same time the September Pound broke out of its consolidation range to the upside. However once the Pound chart begin to move sideways, Cocoa prices fell. The recent sell-off has caused Cocoa butter prices to fall, making processors margins weak, which has hurt demand. However, there are some concerns that mid-crop Cocoa production in the Ivory Coast, the world's largest Cocoa producer, will come in smaller than expected, as heavy rains have delayed arrivals, which are down about 15% from this time last year. Last Thursday's price reversal to the upside after making 1-month lows may signal that a near-term bottom may be in place as lower prices drew fresh buying to the market.
Trading Ideas
Given the near term price reversal seen late last week and strong support found at the May low, traders expecting Cocoa prices to stabilize may wish to look at the Cocoa futures options market for possible trade ideas. Once such trade is selling out of the money Cocoa puts just below major support at the May 14th lows of 2289. An example of this trade is selling September Cocoa 2250 puts. With September Cocoa trading at 2515 as of this writing, the 2250 puts could be sold for around 28 points or $280 per contract plus commissions. The maximum gain is the premium received if September Cocoa is trading above 2250 at expiration in August, with the maximum risk if the futures go to zero. Given the downside risk to the trade, traders may wish to consider exiting the trade if the September futures break below support at 2289.
Technicals
Looking at the daily chart for September Cocoa, we notice the strong buying that occurred once prices attempted to test the 78.6% Fibonacci retracement level. The market is trying to remain above the 100-day moving average, which is used by many longer term traders as a key indicator to whether a market is in a bullish or bearish phase. The 14-day RSI is struggling to get above the 50 level and the trend remains lower. Traders should watch the action in the U.S. Dollar as any signs of strength by the greenback could pull Cocoa prices lower. Support is seen at 2289, with resistance found at the 20-day moving average currently near 2645.
Mike Zarembski, Senior Commodity Analyst
