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The cocoa market settled lower yesterday after reaching the highest price level in over 14 month and taking out the July 2008 high by a couple of ticks. Up at these high levels, the cocoa market has certainly priced in a bullish outlook toward supply and demand and yesterday’s price extension would even seem to have priced in expectations for the Ivory Coast cocoa production in the coming season to fall below 1 million tonnes and a solid recovery in chocolate demand. By fundamental standards, it does appear that the cocoa market has risen above its fundamental value. We do think that December cocoa is technically over due for a price correction. In fact, seeing key reversals in the NY market and London cocoa markets from new contract highs in yesterday’s trade is certainly a strong technical argument that at least a near-term top may have been set. But outside market influences have been a driving factor behind cocoa’s price gains with a weaker trending Dollar and up trending equities raising investor risk appetite for physical commodities such as cocoa as a hedge against inflation. The gains in cocoa off the weakness in the Dollar have been partially tied to the Fed’s extremely loose monetary policy. However, with the Dollar bouncing and equities falling back after the Fed statement yesterday, the market action seemed to reflect concerns that the Fed’s stimulative policies may be nearing an end.
TODAY’S GUIDANCE: The technical action suggests December cocoa has likely set a near-term top. And the extent of a pull back in cocoa is likely to be influenced by the ebb and flow of the Dollar. December cocoa has followed through lower in the early overnight action as gains in the Dollar and a sharply weaker Pound seem to be inspiring more profit taking. If concerns take hold in financial markets that the Fed may be contemplating a stimulus exit strategy, this could trigger a more extensive rally in the Dollar and likely a more significant break in cocoa.
TODAY’S MARKET IDEAS: The key reversal in December cocoa suggests a near-term top has been set with the first retracement target of the late August low to September high at $3,045. A 50% correction of the range is at $2,991 and traders may consider selling a minor bounce. But to reach these retracement levels the cocoa market may need to see continued bullish currency support (strong Dollar & weak Pound). Close in support for December cocoa comes in at $3,091 with resistance at $3,155.
