Ivory Coast Elections Spark Cocoa
Today's Idea
Cocoa supply and demand fundamentals do not support the recent move higher, but the tumultuous political situation in the Ivory Coast remains a wildcard. Technically, the March Cocoa chart shows a breakout, but this could have been driven by short liquidation. For these reasons, some traders expecting a pullback may wish to consider placing a bear put spread, buying the Feb 3000 puts and selling the Feb 2800 puts for a debit of 55, or $550. The trade risks the initial premium for a maximum profit of $1450 if the March futures close below 2800 at expiration.
Fundamentals
Cocoa futures have crossed through the $3000 a ton level on domestic turmoil in the Ivory Coast. The Cocoa growing nation had an ideal growing season, which really kept prices in check. The turmoil surrounding the election seems to have lifted that ceiling, at least for the time being. If there is no resolution to the presidential election anytime soon and the ports remain closed for an extended period of time, spoilage may become a major concern. The bountiful crop year would be all for naught, and it could result in tight supplies. If a quick resolution is reached, prices could fall sharply once ports are reopened. The political situation, which is always dicey, will be the determining factor to the near-term movement of Cocoa and have longer-range supply implications.
Technical Notes
Turning to the chart, the market had a technical breakout from its recent trading range between 2745 and 2955. Prices may soon come up to test the next areas of resistance near 3150 and 3200. The RSI indicator is nearing overbought levels, which could limit the upside potential of the market. From the feverish action of the market yesterday, it appears that quite a few stops were triggered, which could make the breakout suspect in some traders' minds. Traders may be looking for an additional up-day on high volume to confirm the breakout.
Rob Kurzatkowski, Senior Commodity Analyst
