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While yesterday’s higher close in March cocoa would seem to give a technical signal of an upside breakout of the consolidation range, the market continues to have difficulty gaining upside traction. In fact, the weak price action overnight suggests price gains will continue to be hard fought. Part of yesterday’s move in cocoa looked to be currency connected and with the dollar trading a bit firmer in the early overnight action, it will be a challenge for cocoa to follow through higher unless outside market influences turn more supportive. Cocoa rallied yesterday as the Dollar slid on expectations for US interest rates to stay low for a considerable length of time and if that attitude holds, rising investor risk appetite for alternative investments could funnel fresh fund money back into the cocoa market. The January 5th COT report with options for cocoa showed managed money funds further reducing their net long position. But with the market’s technical setup turning positive, trend following funds could become active buyers again if the market can take out overhead resistance. A firm London cocoa trade may be just as important to providing a further lift to NY cocoa since the price action in two markets have been closely tied. It was impressive to see the London cocoa market gain yesterday despite the strength in the Pound since this type of currency action can at times weigh on London market. A bullish environment for commodities is also being cultivated by signs of improving macro economic conditions being reflected in the latest trade news from China which could also benefit cocoa if the outlook for chocolate demand starts to improve. Simmering concerns over Ivory Coast harvest supplies is another factor that continues to underpin cocoa which may soon be pushed to the front burner. A report estimating the weekly cocoa arrival rate to Ivory Coast ports showed a week to week decline in cocoa arrivals and news of dry conditions in certain growing regions may also spark some additional fundamental buying interest in cocoa. Concerns of another Ivory Coast election delay following reports that the ruling party has accused the election director of fraud and asked him to resign may have added some political premium to cocoa prices in yesterday’s trade.
TODAY’S GUIDANCE: March cocoa’s upside move yesterday and close above last week’s high is a positive technical signal, but the early price retreat will certainly frustrate the bull camp. Based purely on the market’s technical setup, the next upside target for March cocoa is at $3,400. But a lack of currency support in the overnight trade puts March cocoa at risk for a retreat back to support levels. Overhead resistance for March cocoa comes in at $3,350 then $3,366 with support near $3,298 then near $3,269.
TODAY’S MARKET IDEAS: Yesterday’s upside breakout suggests March cocoa has the potential to eventually trade back to at $3,400 level perhaps higher. But since trading in NY cocoa has been choppy as the market follows the ebb and flow of the Dollar and the London cocoa, we don’t get the sense NY cocoa is set to make a swift return to the upside, so with the market pulling back in the early overnight action, there will clearly be opportunity to buy March NY cocoa on dips closer to support levels.
