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The cocoa market traded sharply higher yesterday on strong investor buying tied to bullish technical signals and supportive outside market influences. While more short-term price gains may still be possible, the continuing shift to a more bearish fundamental setup suggests cocoa prices are likely to head lower again once the market’s technical condition becomes more balanced. It does appear that March cocoa reached a temporary value zone near $3,100 after holding several tests of this key price level in previous sessions. Cocoa’s oversold condition also seems to have left the market more influenced by bullish outside market forces. In fact, the move higher in cocoa yesterday seemed to be part of a broad-based buying wave in a number of physical commodities tied to a bullish environment for commodities being thrown off by a weak Dollar/high gold trade that raised investor’s risk appetite and the appeal of alternative investments such as cocoa as an inflation hedge. Therefore, we suspect a sharply weaker dollar will also need to be seen in order to provide a further lift in March cocoa back to the $3,310 retracement level. Without strong bullish outside market support, we are skeptical that March cocoa will be able to hold at higher price levels for too long given that the Ivory Coast cocoa bean arrivals to ports are running 76% ahead of last year’s pace and the latest economic data shows a very patchy recovery.
TODAY’S GUIDANCE: A good portion of yesterday’s gains seemed to be tied to the bullish price action in key outside markets. But March cocoa has fallen back in the early going amid a bounce in the dollar, as investor risk appetite seems to have evaporated overnight. While the cocoa market’s oversold condition leaves some upside price risk in place, technical indicators may not be enough to support a more extensive rally in March cocoa unless additional Dollar weakness is seen.
TODAY’S MARKET IDEAS: The bearish shift in the supply outlook for cocoa suggests technical corrections won’t last.
