Cocoa Prices Consolidate As Bullish Momentum Wanes
Today’s Spotlight Market
One potential wild card for Cocoa production this coming year is the formation ?El Nino?. This weather phenomenon produces changes in atmospheric pressure and contributes to rising water temperatures in the tropical regions of the Eastern Pacific Ocean. These changes can significantly alter weather patterns for large parts of the globe. In the past, particularly strong El Nino events have caused hot and dry conditions in the Cocoa growing regions of Africa, which if were to occur this year, could sharply curtail production. However, weather forecasters are still uncertain as to the potential intensity of any El Nino this year, but it does appear that the probability is increasing of an appearance of El Nino in the coming months.?? ?
Fundamentals
Commodity bull markets need a continual dose of bullish news to keep upward momentum intact. This is especially true for markets that have been trending higher for some time. The current price action in Cocoa futures is a perfect example of a bull market in need of a dose of fresh bullish news. After trading at its highest level since the summer of 2011, lead-month May Cocoa prices have stalled after fresh selling emerged once prices crossed above the psychologically important $3000 per ton level.
Weather forecasts from the important Cocoa production areas of West Africa have taken a bearish tone as it has rained in the Ivory Coast, which is the world?s leading Cocoa producing nation. Recent rainfall should help mid-crop production which should allow for the mid-crop harvest to surpass last year?s 370,000 ton production total.
With prices nearing $3000 per ton, there have been some concerns raised by analysts that Cocoa demand could be hurt by current high prices. Some evidence of lower commercial demand may be appearing at exchange approved warehouses where Cocoa inventories have risen sharply of late and currently stand at their highest levels in nearly 8-months.
Although both large and small speculators combined are currently holding a rather large net-long position in Cocoa futures, we should note that some long-liquidation selling was noted in the most recent Commitment of Traders report which may confirm that weak longs are starting to exit the Cocoa market for the lack of further bullish news.
Technical Notes? -? View Today’s Chart
Looking at the daily chart for May Cocoa, we notice that prices have moved into a consolidation pattern the past several weeks, with only a brief ?bull trap? taking prices outside of its recent $110 per ton price range. We do note what appears to be the formation of a bearish divergence in the 14-day RSI as new highs were not made on this momentum indicator during the price move to multi-month highs. Resistance is seen at the March 17th high of 3039, with support found at the January 29th low of 2874.
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