Cocoa Looks Like A Good Topping

December cocoa prices on Friday rallied to a 1-3/4 month high and finished the week up sharply by +5.82%.  Cocoa prices trended higher throughout the week as they extended their 3-week rally.  The latest leg higher in cocoa prices was fueled by fund buying sparked by Wednesday’s report from Reuters that the Ivory Coast and Ghana are considering an output ceiling on cocoa production to support prices and discourage overproduction.

From a wave perspective: Cocoa’s rally since late August has subdived nicely into an A-B-C wave correction where:

• Wave C = 1.38*Wave A (second most common relationship between A and C)
• Wave (2) has retraced .618 of Wave (1). There is some potential to continue to a .782 retracement
• RSI and Stochastic are in the overbought territory on the daily chart
• Momentum, RSI, and Stochastics are showing divergence on the hourly chart.

As Wave (2) gets completed, expectations would be for a Wave (3) decline that is 1.38-1.618 multiple of Wave (1).  That puts the downside target at $1920-$1829.  This interpretation has critical resistance (where the wave count needs to be re-interpreted) at a new high above $2600.  Looking at the long-term forecast on the weekly chart, you can see that being short the cocoa market at these levels offers good reward:risk.

Those who are long this market should feel good about laying off that risk for profit.  Those looking to get short, can jump in now with current signals and risk-reward; however, this is riskier.  The safer way to enter a short position is to wait for a 5-wave decline on a short-term chart (15-minute chart) and a subsequent 3-wave pullback.  This will help determine that the immediate short term trend is lower.  That should allow for some profit and more price action (evidence) that the long-term trend has definitely changed to lower.

Fundamental Information in the Cocoa Market

Lower cocoa output in the Ivory Coast is a positive factor for cocoa prices after Monday’s data showed that Ivory Coast farmers sent only 6,102 metric tons (MT) of cocoa to ports from September 9th to 15th, down -30.8% from the same time last year.  However, cocoa sent to Ivory Coast ports totaled 2.11 million metric tons (MMT) cumulatively from October 1st through July 31st, up +15.3% from the same time last year.  Cocoa prices also have support from the outlook for smaller cocoa output in Ghana after the Ghana Cocoa Board on September 13th cut its Ghana 2019/20 cocoa production estimate to a 3-year low of 800,000 MT from a previous estimate of 950,000 due to an outbreak of the swollen shoot cocoa disease that has killed cocoa trees and cut cocoa output.  Finally, ICE-monitored cocoa inventories have trended lower over the past three months and fell to a 6-3/4 month low of 3.838 million bags on Friday.