Cocoa Day 1 of an Impending Reversal

Cocoa futures have traded to a 5 week high after data was released yesterday on NA grinding numbers. Second quarter cocoa grindings far exceeded the market’s expectations with an 11.8% jump…far above estimates that came in at 3-5%. A bullish number in Europe, NA and Asia all seeing year-on-year increases in Q2 in spite of global headwinds in the EU, a lack luster recovery domestically and a slowdown in the emerging economies. This is the demand side of the equation as for the supply side we are also starting to see glimmers of hope with news that the Ivory Coast has already forward sold 750,000 tonnes of next season’s crop. Early estimates for the 13/14 crop out of this region (the 800 lb gorilla) call for a decline of 100,000 tonnes below the current year. If we experience a reduction in Ghanna, a combination of rebounding demand and lower supplies could keep cocoa well supported. Big picture these circumstances could mean 2700-3000. Shorter-term I think futures have gotten ahead of themselves as I am looking just to play a counter trend move with clients.

Cocoa Futures chart, July 19, 2013

Cocoa Futures chart, July 19, 2013

Since bottoming on 6/28 September cocoa futures have appreciated 12%. I drew these red horizontal lines weeks ago on this chart by observing support and resistance levels over the last five months. One can clearly see that we have bounced off the lower line and it appears that we are finding resistance at the upper line. My stance is futures back off in the coming weeks and trade back below the 50 day MA (red line).

I’ve been fortunate enough to trade both sides of this market in the last few months…will our luck continue? My suggested strategy is short September future while simultaneously buying just out of the money calls 1:1 as a hedge. On a move lower we will make money on the futures and lose money on our options. In the coming weeks I am targeting a move in this contract back to 2225/2250.

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