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March cocoa fell sharply on Friday but managed an inside trading session. A jump in the Dollar triggered profit taking. A sharp break in the Pound seemed to add arbitrage related selling into the mix. March cocoa wasn’t able to fill an old gap at $2,720 from September 26th on last week’s price run. With the Dec 16th COT report with options showing the combined fund and spec net long position increasing by 4,563 contracts to nearly 18,000 contracts, (which is understated given that the market had rallied by nearly another $150 since the report was measured), cocoa’s overbought situation was starting to be reflected in last Friday’s trade. Also, index funds had increased their net long position to 15,270 contracts as of early last week. Therefore, if support between $2,565 (the 200-day moving average) and $2,557 fails to hold, a more extensive break back to $2,500 may be possible. So far this key technical area has held in the overnight trade and if the weak action in the Dollar continues into the US session it could attract fresh buyers to cocoa. In fact, we hesitate to think a major top was set last week since bean supplies in West African and Indonesia remain tight. The majority of the price run up in cocoa has been from trader buying (trend following funds, Index fund and speculators) as most industry buyers were reported to be sidelined on hopes that more supplies will become available early in the New Year to tamp down prices. Some cash buyers also appear to be skeptical that the West African bean supply gap to last year’s levels will continue to stay wide through the harvest period. Some traders are also questioning whether cocoa can stay up at these price levels since there also some signs that the demand for chocolate may be waning amid the global wide recession with butter ratios actually declining from November levels.
