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Once again December cocoa failed near the $3,000 price level on Monday and with volume levels declining on the rally last week, it looks like the cocoa market may need a fresh bullish catalyst before a push above critical resistance is successfully made. The bull camp must be disappointed by the performance yesterday since the market failed to take out the prior session’s high, despite ongoing optimism toward the economy and a fairly impressive range up extension in the US equity market. But it seemed as if the market was more influenced by the currency action on Monday as a weaker Pound and firmer Dollar seemed to prompt some traders to take profits. We also suspect Dec cocoa is having difficulty moving above the $3,000 price level since the market appears to be fundamentally over valued given the prospects for a larger Ivory Coast main crop next season while the outlook for a recovery in cocoa demand remains uncertain. In fact, the cocoa market might have been undermined by news of a setback in Chinese cocoa bean imports which fell 78% on the year through July and that may have diminished optimism for a recovery in chocolate demand going forward. Part of the selling in cocoa yesterday may have been tied to traders raising the supply outlook on reports of good weather conditions in the Ivory Coast this month promoting crop development. Therefore, some long position holders in cocoa may be getting cold feet near the $3,000 price level and that may mean a stronger macro economic view may need to take hold before the market can move to the next higher price range. Since rising investor risk appetite and macro economic optimism have been the main drivers behind cocoa price gains, we suspect Dec cocoa will need to see strong bullish influences from both equity and currency market trends in order to pull cocoa even further above its fundamental value. Otherwise, there will be a natural tendency for the cocoa market to be pulled lower.
TODAY’S GUIDANCE: In the early overnight action Dec cocoa seems to have found chart based price support after an initial test of Monday’s lows held. Better first half profits from Lindt may be raising hopes for a recovery in chocolate demand. The cocoa market so far hasn’t been undermined by the ICCO narrowing their global 2008/09 deficit forecast to 73,000 tonnes, down from an 84,000 tonne deficit, perhaps since the trade is now focused on the 2009/10 season. Chart based buying has lifted the market back toward the critical $3,000 price level, but today’s US reports on housing, consumer confidence, retailer sales and regional manufacturing could test the bull camp’s resolve. We suspect the cocoa market will need to see a stronger equity market and weak Dollar reaction to the US data to provide a fresh dose of macro economic optimism that triggers enough of a speculative buying incentive in order for Dec cocoa to make another attempt to push through $3,000. Otherwise, if today’s scheduled reports raises doubts about the macro economic recovery, cocoa could be pulled back to test critical support at $2,900.
TODAY’S MARKET IDEAS: Dec cocoa looks to be at a critical juncture with the market rallying back towards the $3,000 price level in the overnight trade. If the market again fails at this price level it could start to break down the bull camp’s resolve. Today’s US reports could be influential on cocoa price direction. If the data undermines the economic view, look for the market to give back at least some of the overnight gains.
