The cocoa market closed sharply higher on Wednesday on what looked to be buying mostly motivated by technical signals and favorable outside market influences. Gains in equity markets over the last two sessions and the sell off in the Dollar on Wednesday amid rising investor risk tolerance seemed to be drawing speculative buyers back into the cocoa market. There was also talk that trend following funds turned aggressive buyers of May cocoa on the push above the key technical resistance price of $2,300. Part of the buying may have been tied to reports of poor quality cocoa beans at the tail end of the Ivory Coast main harvest and that may have shifted trader’s focus back to supply issues. Cocoa has fallen sharply over the last month on concerns that a deepening global economic recession will weaken chocolate demand this year. But demand concerns may have been tempered a bit by yesterday’s news that Barry Callebaut, the world’s largest chocolate maker, bought more Cameroon cocoa beans in the Aug’08 through Jan’09 period than the previous season. Also, news of a jump in Indonesia’s Feb cocoa bean exports may also help ease demand concerns. With May cocoa holding several tests of support near the $2,200 price level, it could be an indication that at least for now, the market may have fully priced in a lower demand outlook for chocolate this year. While the market may be positioned for more technical gains, we do think in order to hold at higher price levels an improved macroeconomic view will need to take hold and that is likely to require a sustained recovery in the equity markets and a further slide in the Dollar.
TODAY’S GUIDANCE: May cocoa has traded weaker in the early overnight action and a lack of upside follow through this session will certainly be disappointing to the bull camp. But from a purely technical standpoint, May cocoa remains oversold and more chart based buying is likely to be seen if the market can move above the March 2nd high at $2,378 which would then target $2,472. Along with technical signals, outside market influences, particularly in the equity and currency markets, may become the driving force in cocoa market since there could be a lack of fresh internal fundamental crop news right now as the main crop harvest winds down in the Ivory Coast. But unless a more optimistic view on the global economy is embraced, we doubt that cocoa will be able to hold up at higher prices levels for too long as we suspect doubts over chocolate demand will eventually resurface.
TODAY’S MARKET IDEAS: While the demand outlook remains questionable, a move above the March 2nd high at $2,378 is likely to inspire more chart based buying and that may provide a temporary lift back to $2,472.