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The cocoa market was able to mostly fend off what looked to be another round of speculative selling yesterday tied to a general commodity liquidation wave. But if economic doubts continue to surface, cocoa will likely need bullish currency support to avoid further selling. The market’s rally to 12 month highs last week has been backed by sentiment that a global economic recovery would result in stronger chocolate demand. But that premise is being called into question after the sharp decline in China’s stock market last month and last week’s disappointing readings on US consumer confidence and spending. It certainly appears that slipping economic confidence has been a factor weighing on cocoa prices. And if it were not for the Dollar being under pressure yesterday, we suspect Dec cocoa wouldn’t have been able to hold a test of last week’s low considering US equities and crude oil traded sharply lower, diminishing the appear of cocoa as an alternative investment. Cocoa prices near the $2,800 level still look a bit fundamentally over valued when you consider good growing conditions raise the prospects for higher West African production next season. And if the bullish demand outlook for commodities starts to fade, we suspect this view will need to be offset by significant Dollar weakness in order to prevent a slide in Dec cocoa back to the $2,700 to $2,672 price range this week.
TODAY’S GUIDANCE: The bull camp was given some hope for a price recovery since December cocoa seemed to tentatively reject a probe of last week’s low in yesterday’s trade. And that price action seems to have attracted some fresh buying interest in cocoa overnight. The weaker Dollar trade also seems to be partially responsible for the strength in cocoa. While cocoa is showing some early technical strength, we are concerned buying interest could fade if equities continue to back peddle and the Dollar reverses course to the upside.
TODAY’S MARKET IDEAS: The bull camp in cocoa seems to have the early edge and a move over $2,843 will likely trigger more chart based buying with overhead resistance at $2,861 then near $2,900. But if currency support fades, a test of yesterday’s lows can’t be ruled out.
