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With the market still trading off technical signals, price action hints that a short covering bounce may be imminent. Daily technical indicators have fallen to an oversold extreme and seeing May cocoa hold another test of support near the $3,000 price level, which is also around the 200 day moving average, suggests the aggressive selling seen last week may be drying up for now. Trading in cocoa has been dominated by spread and rollover activity ahead of the March contract’s first notice day on Friday. Outside markets haven’t had much impact on cocoa trading recently and that also reflects a decline in speculative interest in this market. Cocoa was able to close a bit higher yesterday despite a firmer Dollar/weaker Pound trade. This usually has a tendency to pressure the cocoa market. But a recovery bounce in the London cocoa market may have provided some spillover support to NY cocoa on Wednesday. While we suspect the odds are growing for a recovery bounce in cocoa, the upside potential seems limited and gains may be short lived since the fundamentals aren’t particularly supportive. In fact, the industry news out yesterday was generally bearish. Asian cocoa butter ratios traded at the lowest level since 2002 and dealers only expect hand-to-mouth buying despite the upcoming Easter holiday. Ivory Coast domestic cocoa prices paid to farmers have also dropped as exporters have become less concerned about a supply shortfall this season. A London bank is predicting a 5,000 tonne global cocoa surplus for the 2010/11 season.
TODAY’S GUIDANCE: With short-term technical indicators falling to oversold extremes it raises the odds for a recovery bounce. The first retracement of the January high/February low range is at $3,188. But the lack of speculative interest in cocoa recently suggests a technical bounce could end up being short lived and provide a fresh selling opportunity unless a new bullish supply side catalyst surfaces.
