The recent sell off in the cocoa futures market has created a classic Commitment of Traders buy signal.
Big Picture Outlook
Furthermore, this trade is a textbook description of commercial trader behavior and the tools we use in their analysis. Jumping right in, the cocoa market is near its highest levels since early 2011. Obviously, this puts us above any long-term averages and well above recently paid average prices. Most of the price increases have been due to growing demand caused by a macroeconomic shift in global demographics that has put the goodness of chocolaty products within the reach of more people than ever before.
Locking In Future Grinds
Recent trouble in the equity markets along with recent comments by Janet Yellen and Bill Gross have now caused the global growth scenario to question its sustainability. As a result of this, the cocoa market has declined more than 13% from its highs in the last week. The large pullback in prices created an instant shift in the minds of the cocoa processors who’ve come out buying to lock in future grinding inputs under $3,100 per ton. Their direct purchase of more than 14,000 contracts over the last week has caused commercial sentiment to shift from slightly negative to instantly positive. This strategy’s fundamental concept lies in trading only in line with commercial trader sentiment. We want their actions in the market to support our own.
West Africa News
The second part of the criteria was met by the 13% selloff. Our strategy requires tension to be created by movement against the commercial traders compressing the market into a short-term oversold condition. This is exactly what happened last week as the market sold off on news out of West Africa. Finally, Friday’s bounce created the move back above the oversold threshold which we require as a trigger. Our strategy does not enter the market until it has begun to move in our anticipated direction. Friday’s bounce also created the swing low that our strategy employs as a protective stop. Our stop placement is market directed. In this case, new long positions will initiated with protective stops placed at $3,030.
Trade Target
The initial objective in this trade is around $3,300 as the market is likely to close the gap left by the island top. As always, you can view this setup along with its annotated Commitment of Traders cocoa chart on our blog.
