There has been a distinct selling bias in the cocoa market over the last three sessions, and today’s price action could test the bear camp’s resolve. Cocoa was seeing some early firmness in the overnight trade, although
recent rally attempts have lacked follow-through. Since London was closed yesterday, trading was thin and there didn’t seem to be enough selling interest to push July cocoa below critical support at $2,300. But, the Pound making a strong upside move overnight seems to be attracting some arbitrage related buying interest in cocoa. Perhaps the cocoa market is also having a delayed response to yesterday’s better than expected economic news and the upward extension in the equity markets, since both of those developments would seem to improve the outlook for chocolate demand. However, we suspect the price gain in July cocoa is likely due more to a technical bounce rather than representing a change in market sentiment, especially since a nearly 18% drop in the Malaysian 1st Quarter Cocoa Grind clearly indicates industry demand for cocoa remains extremely weak. While July cocoa may be able to manage a bounce back to retracement resistance near $2,412, the big picture fundamentals for this market remain negative. We still see the market vulnerable to an eventual break back towards the March low, given cocoa’s internal bearish setup, including low cocoa butter ratios, high product stocks, weak European exports and de-stocking by manufacturers. We also suspect the prospect for a strong West African mid-cocoa crop will be a stumbling block for the bull camp.
TODAY’S GUIDANCE: Bullish currency action is providing a lift to July cocoa in the early trade, giving the bull camp an initial edge this session. But with the supply/demand setup still favoring the bear camp, we suspect a technical bounce in July cocoa should be limited to around $2,412, and we still believe there is a good chance that July cocoa will eventually be pressured back to the March lows.