Large speculators have been rather heavily bullish on Cocoa, with the most recent Commitment of Traders report showing the non-commercial position totaling nearly 65,000 contracts.
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This sets the stage for some potentially serious long liquidation selling pressure, especially if prices fail to hold above the 200-day moving average, which is currently hovering a mere 100 dollars per ton below current price levels.
Fundamentals
Commodity bulls were counting on the Cocoa market to help supply gains this year, as many analysts were expecting a continuation of the upward price momentum seen in 2014 due to production concerns. However, 2015 is not starting out as many analysts expected, with supplies from the West African growing regions running ahead of expectations and Cocoa grinding data from Asia showing a slowdown in demand. The result has been a sharp decline in prices, with the lead month March contract trading below 2750 for the first time in over a year. Relatively high Cocoa prices appear to have helped curtail demand, as European Cocoa processors crushed over 7% fewer Cocoa beans year over year in the 4th quarter, as processor margins for both Cocoa powder and Cocoa butter were weak. The International Cocoa Organization (ICCO) reported that world Cocoa bean inventories totaled 1.508 million tons at the end of the 2013-14 season, which concluded at the end of September. This was 19,000 tons lower than the previous season. However, there is some uncertainty as to the actual inventory of old-crop Cocoa beans held globally, with some analysts expecting the actual totals to be higher than the ICCO data due to supplies being held in locations, such as Indonesia, that are not included in the ICCO data. The ICCO will publish their update in late February, which should hopefully help clarify whether the Cocoa market is actually in a surplus or deficit going into the 2014-15 season.?
Technical Notes
Looking at the weekly continuation chart for Cocoa futures, we notice prices have moved below the 20-week moving average (MA,) which may have triggered some recent selling pressure by momentum traders. Cocoa bulls may counter that the recent price decline is nothing more than a bull flag formation, especially if prices continue to hold above the long-term 200-week MA. The 14-week RSI has turned weak, but is currently holding above oversold levels, with a current reading of 35.67. 2625 is seen as support for the lead month futures, with resistance found at 3016.??
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