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Trading may turn more technical over the near term and as a result, July cocoa may have some capacity to short cover before beginning the next leg down. Eventually, a move back to test the March lows looks possible. But the cocoa market is also becoming extremely oversold following a nearly 16% price break from highs reached earlier this month. While the fundamental backdrop for cocoa remains bearish, there may also be a lack of fresh industry news right now and trading in cocoa could become a bit more influenced by outside market activity. It seemed as if the recovery in equity market’s yesterday may have helped to ease some of the macro economic demand gloom weighing on the cocoa market recently and may have also provided an extra short covering incentive for traders to book profits. Strength in the Pound yesterday also seemed to provide arbitrage related support to cocoa. However, with cocoa pulling back in the overnight trade, a price recovery this session could be undermined if today’s UK budget announcement triggers a sharp beak in the Pound. While the market’s technical condition may give July cocoa some ability to short cover, we see any price gains in cocoa as a temporary event since weak economic conditions in key US and European chocolate markets leaves the supply/demand outlook bearish.
TODAY’S GUIDANCE: Weak global equity market action and a lower Pound seem to be putting some early pressure on cocoa prices. But given the market’s oversold condition, we are not too sure there will be a lot of downside follow through selling at this time. In fact, we think the market is becoming increasingly vulnerable to short covering. Therefore, short position holders may want to have trailing stops in place to protect profits. On a longer-term basis, the weak demand environment, high European product stocks and the ICCO’s forecast for a global cocoa surplus in the 2009/10 season suggests cocoa near the $2,400 level is still overpriced.
