Cocoa had a volatile week, rallying $120 rally early Monday to a 12 1/2 year high and then falling $280 from Monday’s high through midsession Tuesday. The market continued to slide over the rest of this week, reaching its four-week low early Friday.
This has resulted in key reversal tops on the weekly and nearby charts for the day sessions that could fuel more profit-taking and long liquidation. This month’s negative shift in global risk sentiment likely played a key role in the market’s weakness, but keep in mind that recent quarterly earnings guidance from several major chocolate manufacturers has projected sales growth, indicating the resilience in chocolate demand.
Another factor in this week’s decline has been a more positive take on west African weather. Drier conditions over the past week have allowed the mid-crop harvest to improve after heavy rains caused delays earlier this summer. Cocoa growers are claiming that the heavy rainfall in June and July has gotten the upcoming main crop off to a strong start, which would appear to offer some insurance against the dry conditions expected with the onset of El Nino.
Cocoa’s supply outlook remains tight. The ICCO has forecast a second straight global supply deficit for 2022/23, and El Niño threatens a third one for 2023/24. Reduced fertilizer and pesticide usage have had a negative impact on this season’s output, and the heavy rainfall in June and early July has resulted in the spread of black pod and swollen shoot disease. The US Climate Prediction Center this week gave El Niño a 90% chance of lasting at least through the end of April. El Niño typically brings drier than normal conditions to West Africa and southeast Asia.
December cocoa has slowed its descent and has found support at the 50-day moving average. The RSI has fallen to 33.7 from 76.4 in late July, indicating that the overbought condition has been alleviated. A pullback to the late June and mid-July lows may provide an opportunity to approach the long side of the market.
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Originally Published August 11, 2023
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