Can Cocoa Stay Hot?
Fundamentals
Cocoa futures managed to hold onto gains yesterday in a very choppy session. The third consecutive up day was driven by concerns that the Ivory Coast crop may be smaller than previously expected due to disease. Whether or not the Ivory Coast crop will suffer significant damage from swollen-shoot disease may very well hinge on the government's response. If the government is proactive in helping farmers eradicate the spread of swollen shoot by eliminating diseased trees, then the damage could be minimal and fears overblown. Overall, crop conditions in the Ivory Coast have improved and farmers are looking for some sun for a change, after the recent heavy rains. Supplies are tight, but not as tight as many had expected, which could cool-off buyers. A strong midcrop could shift traders' focus towards demand, rather than supply. Demand has been extremely sluggish, despite prices being below $3,000 a ton. Traders may also look to outside markets to provide clues as to when demand may kick-up. The Eurozone turmoil has provided a boost to the US Dollar and has pushed the British Pound to the lowest level in over a year. This is a bearish force for Cocoa prices. Also, the economic uncertainty suggests that demand could remain lackluster and not stress supplies.
Trading Ideas
Both the technical and fundamental outlooks for the Cocoa market remain a bit murky. The Cocoa market could find itself able to break away from the broad commodities market if the swollen shoot disease is not contained. On the other hand, if the outbreak is contained, Cocoa could find itself at the mercy of outside markets. Likewise, the chart offers few clues as to the price direction. Some traders may wish to trade the 2800-3100 range, while being mindful of a potential breakout.
Technicals
Turning to the chart, we see the September Cocoa contract bouncing after flirting with minor support near the 2900 level. Despite this bounce, the bull camp may be a bit disappointed that prices were not able to push through the 3100 level recently. The market may continue to encounter resistance on the upside from the 100-day moving average and the 3100 level. At the same time, support at the 2800 level has held when tested this year. This suggests that the market could remain range-bound for the foreseeable future.
Robert Kurzatkowski, Trading Specialist
