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Cocoa: Is the Bubble About to Burst?

Posted 06/02/2017 4:29AM CT | Hector Galvan

The cocoa market has continued to prove that risk outweighs most other circumstances in front of any given situation. It has pushed forward over 130 points during this short trading week. Fear that significant rains have caused harm to cocoa fields and additionally opened the door to the loss of cocoa in storage has caused a flight to risk premium. Therefore, even news yesterday from the International Cocoa Organization revising cocoa stocks higher, by about 382,000 tons, was not enough to keep people from covering long positions. Furthermore, Commerzbank and Rabobank have also called for larger surpluses at the end of the next two seasons. Now, it is important to note that certain market risk is not set to last forever. The trade is actively watching for signs that news will turn sunnier in the days and weeks to come which could easily lead to a significant sell off. Yet, until that day it would be wise to keep an eye on the 2100 level. Until we break and close above 2100 in the futures, a likely drop exists. I would recommend that in the long term traders continue to look for long options positions on large sell off in the market. Short term I recommend that one keep in mind the range in between 1800 and 2100. We have been trading the range since the end of February and may continue to do so until we catch a catalyst to break the markets indecisive range.

Sep ’17 Cocoa Daily Chart

Sep '17 Cocoa Daily Chart

Hector Galvan