Global food prices rose 1% in April, with levels now only 9% below the peak reached in February 2011, according to the United Nations. This was driven predominantly by a sharp rise in dairy prices. Considering that I can count on one hand how many times my clients and I have traded milk futures… I’m looking at other food commodities within this trend. Cocoa’s open interest and volumes make it a much more liquid futures market to trade.
Could the recent rise in cocoa play into that global food price figure? As cocoa prices have appreciated 17% from their lows on March 7th, it seems likely. But in my opinion, the easy money has been made on cocoa’s bullish trade and I’m calling an interim top. Futures have just broken below the 9-day MA (red line) and are on the verge of penetrating the 20-day MA (light blue).
Cocoa Futures chart, May 9, 2013
I think prices could retrace 5% from here, taking July futures back down to 2225. Do I think the run is over in cocoa? NO… but from a trading perspective, we should reverse course and play the other side over the coming weeks. In fact, several contracts in the softs sector have interesting set ups. Serious investors should take a look at these, including OJ, sugar, and coffee, along with cocoa.
My suggestion for cocoa is to gain bearish exposure with either back ratio spreads or short futures while selling out-of-the-money puts 1:1. Avid readers of my analysis may remember that I’ve previously pointed to the strong correlation between cocoa and the British Pound. I have speculative clients in bearish Cable trades as well, with the expectation of seeing depreciation in the coming weeks.
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: mbradbard@rcmam.com or 954-929-9997
Risk Disclaimer: The opinions contained herein are for general information only and are not intended to provide specific investment advice or recommendations and are not tailored to any specific’s investor’s needs or investment goals. You should fully understand the risks associated with trading futures, options and retail off-exchange foreign currency transactions (“Forex”) before making any trades. Trading futures, options, and Forex involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change without notice. Past performance is not necessarily indicative of future results.
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