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Cocoa’s Next Leap

Posted 03/23/2017 9:19AM CT | Hector Galvan

The cocoa market has finally sparked the interest of those that have been unsure about it for so many months.  Now, instead of people discarding the likelihood of a resurgence, they have become part of the movement taking prices higher.  So what exactly ignited this market?  In the past two weeks, we have seen a market unable to break the contract lows.  The contract low was tested three times since mid-February.  At the same time that cocoa began to move, the Pound sterling also made a move higher.  Lastly, one can argue that that the low price of cocoa has begun to rebuild physical purchases that will translate to better grinds in the future.

Technical analysis is vital to how one looks at the markets.  It is the road map for reading and following where a market has been and will likely go next.  Therefore, when one finds consistencies in a chart such as a top, a bottom, or a flag, it is important to investigate further.  In the case of cocoa, we find that it has been unable to muster a new contract low since mid-February.  Since then, 1880 has been a tough area for the market to trade under.  It began building a floor that one might say instilled confidence in the contract lows that might have been made.  In this case March 10 was our jumping off point, and so far the trend has held and continues to hold onto its gains.

Next, the British Pound has also aided the market in finding strength.  Cocoa is priced in Pound Sterling, so when the currency either succeeds or fails, it has a direct impact on the price of the commodity.  In this case, the Pound climbed from 121.38 to 125.60 in the last eight days.  As New York Cocoa is traded in dollars, the strong Pound has sustained the commodities trend.

Finally, the argument that lower prices will and have stimulated purchases continues to play a large role in how I look at the market.  The cocoa grind numbers for the first quarter of 2017 will be published next month. The idea is that if we do see larger grind numbers, it will finally convince the trade that a move back to 2300 to 2500 is justified.

July Cocoa Daily Chart

Hector Galvan