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With December cocoa closing at a fresh 15 month high yesterday, it was clear that the market was being held up by its own internal fundamentals. While the push to a new high for the year was reached early in the trading session, it was impressive to see the cocoa market hold up at higher levels despite yesterday’s bounce in the Dollar tied to supportive comments by foreign government officials and a weaker equity market trade. Cocoa held firm even though soft housing and inflation data yesterday undermined equities and appeared to offset more good corporate earnings news which also seemed to dent the macro economic optimism that has been prevalent in the financial markets. Certainly part of the strength in the cocoa is tied to the market’s bullish chart pattern with the push above the early October high leaving December cocoa in a position to eventually take out the $3,385. The cocoa market continues to be supported by ongoing supply side concerns that the Ivory Coast crop in the new season will come in slightly below 2008/09 output levels with port arrivals last season estimated to be down about 14% compared to the previous season (2007/08). The prospect of an Ivory Coast farmer’s cooperative union going on indefinite strike this week may be another factor holding cocoa prices at high levels. Although there were reports yesterday that the cocoa bean supply chain from the field to the ports had not been disrupted by any strike activity yet, the strike threat is still likely stirring up some anxiety since the impact of strikes last year on the crop were clearly felt. Fears that the El Nina weather pattern will damage Indonesia’s crop has also supported bullish sentiment.
TODAY’S GUIDANCE: Seeing December cocoa easily push aside bearish outside market influences in yesterday’s trade would certainly seem to be a reflection of the market’s strong bullish posture. December cocoa was pushed to a new high for the move in the early overnight trade likely tied to news of good earnings results from Cadbury with the company reporting strong 3rd quarter sales growth and predictions for sales to rise 5% next year raising optimism for a recovery in chocolate demand. But traders need to be mindful that part of the gains in the cocoa market have been closely tied to the upward action in the equities and the lower action in the Dollar and we are a bit concerned over the market’s ability to hold at higher price levels if support from these outside markets fade. We are also concerned that if the early weak price action in London cocoa tied to the jump in the Pound gains downside momentum it could undermine the NY cocoa market.
TODAY’S MARKET IDEAS: While we suspect a tightening supply/demand view will eventually lift December cocoa above $3,400, in the short run we feel there is a growing risk to long cocoa position holders since the early weak action in the Dollar may not be enough to offset a softer equity market trade and a profit taking in the London cocoa market. Therefore, longs might want to have trailing profit stops in place just in case profit taking sets in. Support for December cocoa comes in around $3,300 then near $3,243 and below there near $3,206.
