Cocoa Dropping, Looking for a Bounce

June 30, 2017 9:44AM CDT

Cocoa futures dropped this past week as concerns over a cocoa glut resurfaced the prior week and invigorated an already large base of short sellers to stay bearish. Cocoa has struggled to move higher with an expected surplus of beans, along with sluggish growth in demand. The previous week, managed money sold 2,984 lots, to a net short position of 29,703 lots, according to the Commitment of Traders Report.

Last month, the International Cocoa Organization raised its forecast for the 2016-17 growing season, indicating a surplus of 382,000 tons versus a previous estimate of 264,000 tons, as supplies of beans swell in Ivory Coast, the world's largest grower. In the latest report, the ICCO increased its forecast for global production in 2016/2017 by 140,000 tons to a record 4.69 million, up 18.1% from the previous season. The increases were expected to largely come from Ghana and Ivory Coast.

The cocoa crop grows from trees that are planted on cocoa farms. Unlike soybeans and corn, farmers can not change what they plant each year because the cocoa trees continue to produce cocoa as long as the weather does not impact its ability to produce new crop. This makes the supply side less sensitive to price changes for the tree crops.

The fundamentals are starting to become overdone to the downside in my opinion, which signals a strong technical bounce is what traders should be looking for.  The historical cocoa charts provide a good picture of the support in the current price range that should carry the market up higher.  

 

Monthly Cocoa Chart

Monthly Cocoa Chart

 

The weekly chart has too much red to continue the pushing the market lower in the near term.  Technical traders should look to buy while the market is overdone to the downside.  

 

Weekly Cocoa Chart

Weekly Cocoa Chart

 

Source: TradingView

RJO Futures | 222 South Riverside Plaza, Suite 1200 | Chicago, Illinois 60606 | United States
800.441.1616 | 312.373.5478

This material has been prepared by a sales or trading employee or agent of RJO Futures and is, or is in the nature of, a solicitation. This material is not a research report prepared by RJO Futures Research Department. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.