Morning Futures Roundup
Are Bears Losing Their Chocolate Cravings?
The nearly month-long price decline in Cocoa futures came to an abrupt end on Monday, as a move below psychological support at 2000 basis the March futures was met with a surge of speculative buying interest. The rally was a "perfect storm" for traders as large speculators were net-short Cocoa and the market was testing a key support level. However, it was a forecast from Olam International, a Singapore based commodity firm, that 2011-12 Cocoa production would be at a deficit of 100,000 tons that added fuel to the short-covering explosion that erupted on Monday.
Olam predicted that Cocoa production from the Ivory Coast would total only 1 million tons, which is down 300,000 tons from last season. This bullish forecast was all that was needed for a short-covering rally to begin, which triggered buy stops on the way up, as weak bears rushed for the exits. Some additional support may have also come from news out of Ghana, the world's second largest Cocoa producer, that Cocoa shipments have been halted due to a dispute between shippers and the country's ports and harbors authorities.
Cocoa prices were hovering near 3-year lows, as a stronger U.S. Dollar and ample supplies weighed on prices. Fears of demand declines out of Europe due to the ongoing debt crisis were also cited as a factor for the recent price sell-off. Though prices have rallied nearly $300 per ton in just the past two trading sessions, prices have yet to run into resistance, as hedge sellers are awaiting further short-covering buying before locking-in prices. However, there are some strong technical barriers to overcome, especially if the rally continues for another $200 to $300 per ton, which may put the brakes on any bullish attempts to rally the market.
Looking at the daily chart for March Cocoa, we notice the huge reversal day on Monday, as prices moved to 3-year lows, only to rally sharply with a nearly 30- point trading range. Monday's rally sent prices above the downtrend line drawn from the November 8th high and sparked follow-through short-covering buying on Tuesday. The 14-day RSI surged upward, moving form a much oversold 11.80 reading to a weak but more neutral 38.60 on Tuesday. The most recent Commitment of Traders report shows large non-commercial traders net-short 9,659 contracts as of December 6th, and we expect to see that number drop sharply in Friday's report. Monday's low of 1983 now looks to be strong support for March Cocoa, with resistance found at the 20-day moving average currently near the 2315 area.
CLICK HERE FOR THE FULL-SIZED CHART
This article is provided for informational purposes only. No statementin this article should be construed as a recommendation to buy or sell asecurity or to provide investment advice. The content provided has beenobtained from sources deemed reliable but is not guaranteed as toaccuracy and completeness. optionsXpress makes every effort to providetimely information to its recipients but cannot guarantee specificdelivery times due to factors beyond our control.
Derivatives involve substantial risk and are not appropriate for all investors. Please read the "Disclosure Statement for Futures and Options" prior to investing in futures or options.
For investments using a straddle or strangle options strategy thepotential loss is unlimited. Multi-leg option strategies are subject tomultiple commissions. Profits may be eroded by the commission expendedto open and close the positions and other risks apply.
View Mike Zarembski's post archive >