If you’re on the sidelines in the equity market, or don’t necessarily have much conviction long or short at current levels, Cocoa futures may be the non-correlated trade setup you’re looking for.
There’s no clear edge in terms of sentiment or seasonality, but the price action suggests that a tactical bounce may be ahead in the coming weeks.
Is A Cocoa Futures Rally Brewing?
The daily chart of Cocoa futures shows how range-bound this market has been between 2750 and 3400. The flat 200 day and momentum shifting between a bullish and a bearish range are keeping that range firmly intact for the time being.
After a failed breakout above 3400 in early December, prices are now back at the lower end of the range with momentum diverging positively. This combined with prices consolidating in the direction of the underlying trend and the presence of range expansion near support suggest a reversal is likely nearing. And this could set the stage for a Cocoa futures rally.
Cocoa Futures Daily Chart
The hourly chart for Cocoa futures shows prices attempting to break out of the downtrend channel that’s been intact since early January as momentum diverges positively. Although this action is constructive, the presence of a downward sloping 200 hour moving average will continue to be a headwind for Cocoa prices.
If prices can continue to hold above 2745-2750 as they have over the past two weeks and can consolidate toward the upper end of the recent intraday range, the 200 hour moving average will have time to flatten and start to rise. With that headwind out of the way, a sustainable Cocoa futures rally can begin to develop. Following this development, longs will want to see prices close above 2855 with momentum hitting overbought conditions to confirm the bullish momentum divergence and breakout.
Cocoa Futures Hourly Chart
The Bottom Line: We may be in the early stages of a tactical bounce in the Cocoa futures market. The weight of evidence continues to suggest that this market is going to remain range-bound for the foreseeable future and the risk is very well-defined against the recent lows. It looks like a few more days of action will be needed to address some potential headwinds on the intraday chart, but as long as Cocoa prices continue to close above 2745 the bias remains to the upside. Longs can look to take profits around roughly 3050-3100 and revisit the thesis at that point to see if prices can consolidate for a move toward the top of the range near 3400.
As always, if you have any questions feel free to reach out and I’ll get back to you as soon as I can. Thanks for reading.
Read more from Tom: A Bottom In Crude Oil, But Perhaps Not “The” Bottom
Twitter: @BruniCharting
The author does not have a position in any of mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
