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The cocoa market was swept sharply higher yesterday with a good portion of the gains tied to the broad based rally in physical commodity markets. An influx of investment flows into cocoa is being seen based largely on the weakening Dollar. In fact, if focus remains on the broader macro economic picture, we suspect a new wave of fund investment buying may have the potential to lift March cocoa back to the October highs at least temporarily, even as cocoa’s own fundamentals are turning negative. The November 24th COT report with options for cocoa show money managers and trend following funds raising their net long position in cocoa and seeing March cocoa close back above $3,350 could encourage more chart based buying. Commodities such as cocoa were lifted yesterday in tandem with strong equity market gains partly tied to a more positive macro economic view now that the concerns have faded over the Dubai debt situation derailing the global recovery. With economic optimism being lifted by data from the US, China and Europe yesterday, part of the gains in cocoa may have been on an improved outlook for chocolate demand. Rising investor risk appetite tied to a sinking Dollar and a higher equity/gold trade could continue to boost the appeal of cocoa as an alternative investment if the outside market action keeps the environment bullish for commodities. And if that occurs, then there is a chance for the cocoa market to be pushed higher in the short run amid broad based commodity sector buying. But on the other hand, if outside market support begins to fade, cocoa doesn’t appear to have the fundamental backing to keep prices elevated and the market could quickly retreat.
TODAY’S GUIDANCE: Some traders are attributing the buying in cocoa and other physical markets yesterday to large commodity funds setting up fresh positions at the start of their new financial year that began December 1st. It is clear from yesterday’s price action that outside markets are having a big impact on the direction in cocoa right now and that will likely keep the trade action volatile. With March cocoa in a bullish technical position and funds starting to bulk up their net long length, a rally back to the October high can’t be ruled out. But if the supply outlook for cocoa continues to improve we remain skeptical that cocoa will be able to hold at these higher prices levels for too long if the rally is based only on bullish outside market influences. Once the influx of fund buying subsides, we suspect the market will eventually fall back under the weight of rising global cocoa bean supplies.
TODAY’S MARKET IDEAS: A rally in March cocoa back to the October high may be possible if outside market influences stay supportive since funds have turned active buyers and the market’s technical setup is short-term bullish. Overhead resistance for March cocoa comes in at $3,378 then near $3,400 and again at $3,439 with support at $3,310 then near $3,271.
