Chocolate lovers have an eye on cocoa prices. The debate rages on… will Baby Ruth bars get offered up at a discount? Or will M&Ms soon be considered a luxury item?
Ok ok… I tease. But futures traders should have their eye on this oft-overlooked softs market.
Cocoa’s been trending lower for the last seven months, with prices down by 20%. At their lows, cocoa was within just 1.7% of the $2,000 mark. Yet since bottoming out about a month ago, prices have bounced 1.7% higher and as I’m writing May futures are trading above both the 9- and 20-day MAs (red and light blue lines).
I see a trading opportunity in cocoa’s possible move back to the 50% Fibonacci level, about 8% overhead in May futures. I doubt this move would make a difference at the checkout line of your local supermarket, but we can squeeze a trade out of it.
Cocoa has been establishing a base for the last six weeks, consolidating within a tight, $150 trading range. Only early-bulls are in now, but a settlement above $2200 in May should get buyers much more active. I suggest speculators nibble into bullish trade on anticipation of a coming breakout. Show some self-control – leave some of the chocolate bar for later – you’ll have a chance to add to bullish trade once we see confirmation over $2200. This, of course, is my opinion as I do not claim to have a crystal ball.
The chart above is of the May contract, but I prefer to establish new positions in July contracts which have just over two months of time left. At-the-money call options on cocoa are going for about $825 plus fees, as of this post. At just better than a 50% delta, this option strategy could pick up a yield of about 50% if July futures trade back to the 38.2% Fib level at $2,300.
Traders in the futures market are advised to put in stops under the recent lows. Trail that stop under the 20-day MA as cocoa advances in the coming weeks. The contract size of cocoa is 10 metric tons – a $1 move in the futures market represents a $10 gain/loss. Size your position accordingly.
As always, I’m here to discuss specifics and give guidance. Give me a call…
To discuss in more detail this chart or any other you can reach me at: firstname.lastname@example.org or 954-929-9997
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