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July cocoa only managed to close slightly higher on Thursday as an early short covering rally tied to outside market activity fizzled. Cocoa has seen a choppy two sided trade overnight at times finding some currency related support tied to a weaker Dollar and firmer Pound. But we see limited upside potential and more downside price risk in cocoa given that the German 1st quarter cocoa grind which fell 21.3% on the year, clearly confirms chocolate demand is being impacted by the global economic recession. When you combine other recent reports of high European product stocks, low butter ratios and expectations for Asian cocoa grinding to be down 29% this year, it certainly appears that July cocoa near the $2,600 level looks to be overpriced based on the market’s internal fundamentals. If Ivory Coast growing conditions remain favorable, a larger mid-season cocoa crop will also help to ease the supply tightness. But it has been frustrating for the bear camp since recent equity market gains seem to be reviving a more optimistic macroeconomic view that has been able to periodically provide a lift to cocoa prices. The dramatic price swings in July cocoa last week certainly leave the market with plenty of upside risk potential. Even though supply/demand outlook for cocoa seems to be turning increasingly bearish, we suspect the impressive recovery in the Dollar may have been the primary factor undermining cocoa in Thursday’s trade. With the ICCO predicting a global supply surplus next season, we do see the potential for July cocoa to head back below $2,400. But bears might try to be patient and wait to sell cocoa on rallies given the market’s recent capacity to short cover.
TODAY’S GUIDANCE: The lower highs seen in last week’s trade leaves the chart setup a bit technically weak, especially if last Friday’s high at $2,620 holds. We remain cautiously bearish. An improving macroeconomic view looks to be working against the bear camp. However, we do expect to see more aggressive chart based selling in July cocoa if the market fails to hold key technical support points at $2,533 and $2,472. The April 7th Commitment of Traders report with options for cocoa showed the “combined” spec and fund net long position rose to 30,350 contracts as of early last week and that could leave the market vulnerable to more aggressive selling if support levels are violated.
TODAY’S MARKET IDEAS: A very weak global demand outlook leaves cocoa vulnerable to a more extensive price slide unless outside market action attracts fresh investor buying. Near term resistance for July cocoa comes in near $2,629 and again at $2,677 with support near $2,533 then around $2,518 and below there near $2,485.
