This Chocolate Isn't Sweet
Fundamentals
Cocoa futures continued their slide, falling to a six-month low on demand concerns. Traders are concerned that the sharp appreciation from lows made in late 2008 may dissuade buyers. Chocolatiers have looked to cut costs in the past by decreasing the amount of Cocoa in their finished product or reducing the size and keeping the same content for higher end brands. To make matters worse for Cocoa bulls, Ivory Coast deliveries have climbed 2.6 percent above last year's figures. The Cocoa harvest is also almost 7% of last crop year's pace. This will likely keep physical buying tame, as end-users will remain reluctant to buy at these higher price levels in light of the high prices. Also, the political situation in the Ivory Coast, which always seems to be dicey, has calmed considerably in recent days, with protests called off in light of the new election commission. For the time being, at least, the political situation is not part of the equation. The US Dollar has stood its ground recently, which has caused demand for commodities to remain lackluster, at best. Commodities that are vulnerable to selling pressure, such as Cocoa, have suffered due to poor fundamentals.
Trading Ideas
Both the fundamental and technical outlooks for the Cocoa market have tilted in the bear camp's favor. The only market-changing events that bulls can hope for at this point are a revival of political tensions in the Ivory Coast and a sudden collapse in the price of the greenback. The price of the commodity has swung wildly, suggesting some traders may wish to consider entering into a bearish option strategy and avoid the futures market, as it can be extremely unpredictable. Some traders may look to buy the May Cocoa 2800 puts (CCK02800P) and sell the May 2700 puts (CCK02700P) for a debit of 35 points or better. The trade risks its initial investment of $350 for a potential profit of $650 if the futures contract closes below 2700 on the April 1st expiration date.
Technicals
Turning to the weekly Cocoa chart, we see the market confirming a triple-top pattern. After initially holding its ground near the 3000 market, the selling pressure in the front month May contract has hit a fever pitch. Yesterday's close was slightly below the significant close of 2828 over one year ago. Failure to hold the 2828 level could result in prices coming down to the 2500 area or possibly even 2250. Yesterday's close was also below the first Fibonacci support line at 2877, suggesting prices could come down to 2675 in the near-term. The sharp selling pressure could result in oversold market conditions, which could be mildly supportive of price in the near future.
Rob Kurzatkowski, Senior Commodity Analyst
