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Cocoa Market May Become Too Bitter for Investors

Posted 04/07/2017 10:32AM CT | Hector Galvan

Cocoa futures have remained a bit softer into the end of the week, with a general flight to safety of the US Dollar leading to the market trading to its lows for April.  With May ’17 cocoa futures attempting to build a base above the 2100 handle, it will be imperative for the trade to watch what could be a 2200-2100 range in the near term.  Financing concerns for the major West African producers have been dominating headlines recently, even though a decline in supply concerns have muted the rally form the past few weeks. 

The International Monetary Fund will continue to provide support, assisting with the lack of financing cocoa producers in the Ivory Coast have had issues with lately.  With the IMF’s funding, unless there is a major weather event development, it seems global supplies will remain well stocked and in a surplus.  The latest commitment of traders report showed a net speculative short positing in cocoa futures, and that is expected to continue to build in the near term.  Market consensus has yet to hit any extremes in the COT data, and this will be an important data point to consider if there is a longer term base forming.

On a technical perspective, and with the continuation of the US Dollar rally after both the US strike in Syria and the latest NFP report, cocoa remains in a technical range between 2100 and 2200.  A break below the 2100 handle, and a sustained daily close, will likely lead to continued declines and a test of the 2000 psychological support.  A break above the 2200, opens the door for bulls to the 2350-2400 area, where the next major cluster of resistance levels lies.  It’s a range until it fails, but with the current geopolitical climate and general uptick in volatility, when this range does break cocoa will likely be due for a move.

 

July Cocoa Daily Chart

Hector Galvan