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With September cocoa pushing through key resistance after yesterday’s settlement price was reached suggests market sentiment and momentum are still swayed to the upside. The cocoa market has followed though higher in the overnight trade finding support from a firmer London prices, supply side concerns and improved macro economic sentiment. Cocoa appears to be getting a lift from a lower ICCO forecast for this season’s Indonesian crop and warnings about the potential negative impact on next season’s crop from the developing El Nino weather condition. News that cocoa arrivals at the Ivory Coast continue to run significantly below year ago levels might be giving the bull camp some added ammunition to fret over lost production in a distant crop. But it seems as if the rally in equity markets yesterday and overnight has been the main catalyst pulling September cocoa above the key chart levels with stock market gains putting a more optimistic spin on the macro economic outlook. A recovery in the Pound may also be providing some price support to cocoa as the currency saw a significant reversal yesterday and continuing to trade higher overnight on supportive comments from the BOE suggesting the worst of the UK recession has passed. We still question the cocoa market’s ability to hold at these higher price levels on just the prospect for potential El Nino damage to the Indonesian crop. But given the positive reaction in cocoa to gains in equity markets yesterday, there is certainly the potential for September cocoa to move into a higher trading range above the $2,700 price level if a better macro economic view begins to take hold in reaction to this week’s US earnings and economic news. The reversal action from the $2,444 level has been powerful, price dips seem to be attracting buyers and with open interest rising, there really hasn’t been any sign that the technical move may be near complete.
TODAY’S GUIDANCE: The move above $2,700 keeps the market on track for a possible move back towards the $2,784 to $2,800 price range. Market focus has switched back to supply side concerns and that left the trade little bothered by news of a 5% decline in the Brazil June cocoa grind. But in order to completely shake off a potentially sharp drop in the US 2nd quarter cocoa grind out on Thursday, we suspect this week’s financial/economic news will need to support a more optimistic macro economic view. Otherwise, cocoa above $2,700 begins to look a bit pricey. Close in support comes in at $2,671 then $2,622 with resistance at $2,717 to $2,740.
