More Expensive Hot Chocolate?

Site Administrator | November 1, 2011

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Just as the weather starts to cool off, it looks like we might have a rally forming in Cocoa.  Cocoa prices have been under pressure since March after posting contract highs around 3600.  Year-to-date, Cocoa is down approximately -14% and down nearly -13% for the quarter.  The only other commodity in the softs complex with positive gains this year is Orange Juice (+4.4%) while Coffee is down approximately -6.6% and Cotton down a whopping -31%.  Cocoa depends heavily on West Africa exports and reduced demand coupled along with political unrest in the producing nations can have a significant impact on Cocoa prices.

As a technical trader, we try and determine the overall trend, look for key support and resistance levels, and developing chart patterns.  As you can see in Figure 1, we have what appears to be a 1-2-3 bottom formation after posting a 2563 low on October 18th.  The #1 point is the low at 2563 and the #2 point is the short-term bounce back to 2791.  Please note that this formation is not yet complete until we have established #3 point (will be a lower low that does NOT exceed the #1 point – if a lower low is made then the formation is voided).  We would ideally like to see a push back down to the 2600 levels before heading back higher.

Once the #3 point is in place, the setup calls for a stop placed slightly above the #2 level (2791) and then to wait for a breakout higher.  A more conservative approach may be to wait for a CLOSE above 2791 or 2801 to begin initiating new long positions.  If the breakout occurs, the pattern forecasts the first target to be the distance between the #1 and #3 points, or approximately 160 ticks which equals $1600 / contract.  Notice that the target would also coincide with resistance at the past support of the 2900 area.  If Cocoa breaks through 2900, tests of the down trendline at 3025 and then higher back to the 50% retracement level ay 3095 could be in store. The risk based on the pattern is a stop loss below point #1 or possibly below #3 if looking for a tighter stop.

Chart 1

Chart 2

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