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The market looks vulnerable to a further downside downside break into next week with the firm US dollar and better weather in the Ivory Coast helping to pressure the market and helping to ease supply fears. Demand fears seem to be on the rise as talk of higher European stocks this week rekindled the concern of slackening global cocoa/chocolate demand. In our opinion, the chocolate industry as a whole recently saw many manufacturers reduce serving sizes, reduce chocolate percentages or even began to use cocoa substitutes and that in conjunction with the slackening global economy might be starting to catch up to the cocoa market. The cocoa market attempted an upside breakout yesterday but was unable to sustain the rally. Strength in the Dollar and ongoing demand side concerns appear to have the market in a limited posture. In fact, seeing the May cocoa contract repeatedly fail to rise above the $2,626 level might signal a lack of bullish resolve. The Ivory Coast seemed to be getting quite a bit of rain in the coming session but some rain would be initially beneficial to the crop and only minimally negative to prices. Technically, momentum indicators are showing an overbought condition and the declining open interest (118,787 on March 11th to 109,744 yesterday) suggests that the foundation of the recent rally is short-covering. In addition, the market seems to have gapped below the uptrend channel overnight which adds to the possibility of increased long liquidation selling over the near-term.
TODAY’S GUIDANCE: Near term resistance for May cocoa comes in at $2,562 with $2,463 and $2,412 as next support.
