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Softs: A Short Set-Up In Cocoa Futures

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December cocoa futures have reached their highest level in over a year. The resistance they are nearing at $2,800 per ton will likely stall the market which has been rallying on Indonesian news of higher grinding totals. Indonesia has been building grinding capacity to steal market share from Malaysia. Given the political marketing game being played by these two, some traders believe that the Indonesian news may be overstated. The cocoa market is used to shifty news reports from production in the Ivory Coast through processing in Asia.

THE CHART

Technically, cocoa’s rally took a bit of a beating on Wednesday and Thursday. The hasty retreat from multi-year highs leaves many momentum indicators like stochastics, RSI as well as my proprietary trigger suggesting we’ve created a bearish divergence with a strong chance for a short-term top. At the very least, the sloppy action late last week has brought all of these indicators back from the overbought levels they had been registering on the daily chart.

A STRONG HIGH

The recent high of $2,780 is a pretty good number for a top in this rally. The 38.2% Fibonacci level from 2011’s high above $3,800 down to last year’s lows around $2,050 comes in at $2,762. We view the combined factors as a solid setup for trading this market from the short side. We’ll be watching the screens and looking for a place to get some sold while using the recent $2,780 high as our protective stop. The minimum objective is a test of the 23.6% Fibonacci level at $2,486. This test would provide a nice short trade while still keeping the larger trend intact.

We’ve posted the weekly cocoa chart here with the Fibonacci levels as well as the momentum indicators. Please understand that viewing the chart on a daily time frame will show all of the momentum indicators back below their overbought upper boundaries.

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edjaworska1: Softs: A Short Set-Up In Cocoa Futures http://t.co/lTuAMycaSL via @TraderPlanet
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Visitor - Andy Waldock: The cocoa market has risen based on Asian demand. Ivory Coast supplies may come in a hair under the projected estimates and odds are this will be the first deficit in cocoa in years. Continued Chinese strength could push the market to $3,000-$3,200. We'll know more once the Commitment of Traders reports are back on track this week and we can determine who the buyers and sellers are.
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Visitor - Jake: I think there are concerns about crop yield loss with poor weather, right? After a correction, what kind of long-term upside targets do you see?
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