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December cocoa exploded to the upside in another huge trading range session which drove the market into fresh contract highs. Strength in the London cocoa market along with higher equities and a weaker Dollar was certainly a factor that initially lifted cocoa up from session lows, but we can’t lay all the blame on bullish outside market influences. The higher equity trade apparently did help the cocoa market shake free from the macro economic doubts being raised by last week’s employment data that weighed on cocoa. Also, the Press seemed to want to tie the rally to the fact that Ivory Coast cocoa production officially fell 14% in the 2008/09 season although this is hardly a shock to traders. But news that Ivory Coast arrivals for the first week of the new season continued to lag last year’s pace may have had more of an influence in stoking supply side fears. There was also a report yesterday of low rainfall in areas of the Ivory Coast and that could have hyped-up tightening supply concerns. Certainly yesterday’s industry news which was mostly supportive, likely helped to boost market sentiment, but we still have doubts that it was the main driving force in yesterday’s trade. In fact, the bulk of the move looks to have been technically based triggered by automatic buy stops as the market pushed through several overhead resistance layers. But we suspect some of the buying may be related to various index funds having to diversify their commodity holdings into cocoa and other markets and traders believe this will support new buying for the second half of October.
TODAY’S GUIDANCE: Yesterday’s price surge was done on relatively heavy volume and the technical action puts the next upside target for December cocoa at $3,315. December cocoa has pulled back in the early overnight action with yesterday’s price move likely enticing some traders to book profits. Today’s trade will certainly test the bull camp’s resolve to hold the market up at these price levels. But with supply tightness becoming more of a market concern and the early action in outside markets supportive with a lower trade in the Dollar and a firmer trade in equities, profit taking breaks in cocoa back to support levels are likely to attract fresh buying.
TODAY’S MARKET IDEAS: There seem to be a variety of factors supporting the bull camp right now including the market’s technical setup, outside market support, macro economic optimism and tightening supply concerns. Support comes in at $3,175 and below there around $3,153.
