A Victim Of Its Own Success
Today’s Spotlight Market
Cocoa futures were the leader of a rather exclusive club of major commodity markets that actually posted a gain in 2015. In addition to Cocoa?s +10% gain, only Orange Juice +8%, Cotton +6 and Sugar +2% were in the green on December 31. To paraphrase the popular TV show the ?Biggest Loser? we saw Heating Oil post a -37% loss which led all commodities in the loss column in 2015, with a ?Dishonorable Mention? going out to Palladium, which declined by -30% last year.
Fundamentals
The Cocoa futures market was one of the very few bright spots for commodity bulls in 2015, rising 10% in a year where major commodity-wide indices posted losses of over 24%. The Cocoa market experienced supply issues as dry weather conditions in the major growing regions of West Africa and Southeast Asia help to curtail production. The lingering El Nino weather event is expected to put further pressure on Cocoa producers as we begin 2016. The consensus from analysts is for the Cocoa market to experience a 100,000 ton deficit this season as the expected production loss should more than offset a modest expected decline in demand. However, as we begin 2016, Cocoa prices have failed to respond to bullish fundamentals, having fallen to 3-month lows on what appears to be long-liquidation selling by weak bulls. Markets in general started off on a sour note as equity and commodity prices fell on concerns of slowing economic growth, especially out of China, as well as a flair-up of Middle East tensions between Saudi Arabia and Iran. The most recent Commitment of Traders report shows a combined non-commercial and non-reportable net-long position in Cocoa of 65,681 contracts as of December 29. This was down just over 1,800 contracts for the week and leaves the market vulnerable to further long-liquidation selling should prices fail to rebound off of recent lows.???? ?
Technical Notes? -? View Today’s Chart
Looking at the daily chart for March Cocoa, we notice that the recent steep price decline has caused the market to fall below the key 200-day moving average (MA) for the first time since May of last year. The fall below the long-term moving average most likely triggered long liquidation selling by trend following traders, as many systems use the 200-day MA as a determinant if a market is overall in a bullish or bearish trend. Notice that volume increased sharply the past two days, which adds additional credence to the belief that the bull market in Cocoa is in trouble. The 14-day RSI has moved slightly into oversold territory with a current reading of 29.20. Traders should pay close attention to price movement with the RSI at oversold levels to see if a price rebound occurs soon. Chart support is found just below the psychologically important 3000 price level at the August 24 low of 2994.Resistance is seen at the December 24 intermediate high of 3269.
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