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The higher close in March cocoa yesterday leaves it on an upward track which still gives the edge to the bull camp. In fact, cocoa prices have firmed in the early overnight action as the market seems to be benefiting from general bullish commodity market sentiment tied to robust industrial and trade data from China improving the global demand outlook. Cocoa seems to be getting spill over support from the early gains in gold, equities and oil. A weaker Dollar may also be raising investor’s risk appetite and the appeal of physical commodities such as cocoa as an alternative asset. Although the overnight gains put March cocoa within striking distance of the October high, short term technical indicators at overbought extremes also raises the risk to long position holders since it leaves the market vulnerable to heavy profit taking once the buying begins to ebb. The NY cocoa trade seems to be most closely connected to the action in London, where prices were pushed to a new contract and 25 year high in yesterday’s trade. A bullish psychology has taken hold on the idea that the strong harvest flow from the Ivory Coast will start to fade in the second half of the main season in January leaving overall supplies tight. A report showing Ivory Coast cocoa export declaration were down 6% for the season through early December may have contributed to the tightening view. The cocoa market may have also been supported in yesterday’s trade by the US government weather agency predicting the El Nino weather pattern will extend into the spring. Cocoa prices were supported earlier this year on El Nino weather concerns and if this weather condition intensifies, it could start to boost speculation again that dry conditions could damage Indonesia’s bean crop. With the London market providing upward price leadership, NY cocoa seemed to easily shrug off a report from Nigerian cocoa farmers saying that mid-crop development has been very good.
TODAY’S GUIDANCE: March cocoa looks poised to make an upward extension above the October high. But the London market, more so than the Dollar right now, appears to be the main influence on NY cocoa market direction. Therefore, the extent of the rally in NY March cocoa may depend on the continued strength in the London market. On a break above the October high at $3,439, buy stops are likely to propel March cocoa higher and pave the way from an eventual rally to $3,500. But with funds increasing their net long positions in cocoa recently, a failure at this key level or if profit taking in the London market surfaces, it could also trigger an extensive profit taking break in March NY cocoa. It will be critical for March cocoa to hold above uptrend channel support, which comes in at $3,375 today otherwise, more chart based selling is likely to be seen.
TODAY’S MARKET IDEAS: While the bulls have a clear stronghold, we still believe there is a growing risk to long position holders given the market’s technical condition. Therefore, traders may want to have some type of option profit protection strategy in place.
