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December cocoa closed at the highest price level in 14 months supported by chart based buying as well as supply side concerns. Although the market is beginning to look a bit overbought at these levels, December cocoa may avoid a significant price break since there seem to be a variety of factors behind the market’s rally. Certainly holding a test of the critical $3,000 price level earlier this week has given December cocoa some added upside momentum. But beyond that, the trade seems to be getting increasingly concerned that the Ivory Cost main crop in the 2009/10 season will not only fall short of 1 million tonnes and below this season’s output, but will also have quality problems due to aging trees, disease and cool weather conditions. With the head of the Ivory Coast Coffee & Cocoa Management Committee saying available cocoa bean exports will be lower in the coming season due to a lack of stock from previous seasons, it doesn’t appear the market’s crop supply fears have been fully factored into prices. At the same time, yesterday’s better than expected economic reports seems to be adding to bullish sentiment for a recovery in chocolate demand as economic conditions improve. In fact, there were even reports yesterday that attributed part of the strength in cocoa to commercial buying. The jump in US producer prices along with gains in oil and gold yesterday also seemed to stir up commodity inflation anxieties which appeared to attract a wave of fresh speculative buying in a variety of physical commodity markets including cocoa.
TODAY’S GUIDANCE: December cocoa managed another higher close yesterday which keeps the market on a strong upward path that could eventually lift prices back to the 2008 high at $3,217. With the latest COT report with options for cocoa showing the combined speculative position at less than half the record net long level seen in January 2008 suggests the market likely has more upside capacity. In fact, with the Dollar being pushed to a new low and most global equity markets trading higher, rising investor risk appetite and macro economic optimism gave a strong lift to December cocoa in the overnight trade.
TODAY’S MARKET IDEAS: The market is in a strong technical position to test the July 2008 high near $3,217. But December cocoa will also become increasingly vulnerable to bouts of profit taking at these price levels and long position holders should have trailing profit stops in place. With supply side fears starting to take hold we suspect the market will continue to trend higher. But, traders wanting to buy cocoa should wait for a pull back to chart support levels before attempting to get long. Resistance for December cocoa comes in at $3,180 then $3,200 and above there at $3,217 with support at $3,117 and then $3,094 and below there $3,055.
