Looking for a Floor
Fundamentals
Cocoa futures have rebounded over the past week on short-covering and tight supplies. After suffering, following the overall commodities markets lower in recent weeks on Dollar strength, traders seemed to have shifted their focus back toward the fundamental outlook. Expectations for the output deficit have been raised to 69,000 metric tons, up from analyst estimates of a 18,000 metric ton shortfall earlier this year. The production shortfall more than counters last year's surplus of 67,000 metric tons. The choppiness in equity prices has helped take some of the pressure off longs, and it seems as though the shock from the Greek financial crisis was quickly priced into the market, allowing buyers to step in. This is the slow time of the year for crop news, so traders tend to look to outside markets to find direction. The huge revision by the ICO does give traders some fresh market news to trade off of, but the bullish sentiment may wear off without a fresh infusion of news. The slowness of market specific news could make the Cocoa market vulnerable to swings in the Dollar and equity prices.
Trading Ideas
It looks as though both the fundamental and technical outlooks for the Cocoa market have improved, but remain vulnerable. The slow season for news could make the market succumb to outside forces, despite solid market fundamentals. The sharp move lower on the chart followed by a rebound in prices that is not quite as sharp of a move suggests possible bearish consolidation. Also, the bearish divergence hints at a dead cat bounce. For these reasons, some traders may wish to wait for the July contract to either close above the 3000 level on the upside or 2800 level on the downside before taking action.
Technicals
Turning to the chart, we see the July Cocoa contract bouncing off the 2800 level, which can be seen as a critical support level. Beyond 2800, the next support area comes in around the 2500 level. Resistance can be seen at 3000. In order for the Cocoa market to gain further upside momentum, prices would have to cross recent highs near 3250. The momentum indicator is showing strong bearish divergence from both price and RSI, suggesting the bounce off the 2800 level may be an aberration.
Rob Kurzatkowski, Trading Specialist
