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May cocoa settled sharply lower on Monday, continuing the price slide from last week amid heavy fund and speculative selling. Given that the market has likely become short term oversold following the steep price decline from the February high, it won’t be surprising to see some degree of short covering in May cocoa. However, we suspect such short covering rally attempts will attract fresh selling, as the market’s technical pattern has turned bearish amid a less supportive fundamental view. May cocoa has fallen below several key support levels since topping earlier this month, and the probe under the January low yesterday leaves the chart setup negative and targets an eventual test of $2,298, which is a 0.618 retracement of the rally from the November low to the February high. The selling in cocoa has become more aggressive as the supply outlook for the Ivory Coast crop has continued to improve. Reports that abundant rains in the Ivory Coast this month have improved growing conditions for the mid crop have undermined cocoa sentiment. Also, a higher flow of cocoa bean arrivals to Ivory Coast ports in recent weeks has helped their main crop supply catch up a bit to last year’s output, with the 2008/09 harvest now less than 19% below year ago compared to over a 40% gap seen in late December. The slide in US equity markets leaves the economic outlook bearish and lowers the demand prospects for a non-essential food commodity such as cocoa. Contributing to a more pessimistic outlook for global cocoa demand are escalating concerns over a deepening economic recession in Europe and a sharp decline in China’s cocoa bean imports in January.
TODAY’S GUIDANCE: It was particularly bearish to see cocoa fall even in the face of a stronger Pound, and that suggest the market’s internal fundamentals, more than currency influences, are driving market direction right now. Short position holders might want to have trailing profit stops in place just in case May cocoa attempts some type of technical bounce, as retracement support comes in just under the $2,300 level. We see limited upside capacity given that the supply outlook for cocoa looks less tight while demand is questionable, and that could eventually pressure May cocoa back to the $2,000 to $2,100 price range.
