A look at its long-term monthly chart shows the cocoa market has been in a strong major uptrend dating back to its low of $1,983/ton at the end of December 2011. During the period of consolidation that followed, monthly stochastics established dual bullish crossovers at the end of February 2012 and June 2012, indicating the major trend was set to turn up.
Note that the initial rally took the spot-month contract to a test of resistance near $2,668, a price that marks the 38.2% retracement level of the previous major downtrend from $3,775 through the December 2011 low. This led to another consolidation phase, though the trend was now up, lasting until a bullish breakout in August 2013.
As the uptrend gained momentum, notice the action of the spot-month contract as it neared the 50% retracement level of $2,879 at the end of 2013. January 2014 saw the contract trade below the December 2013 low of $2,692 before rallying above the December high of $2,844 and closing higher for the month. This created a bullish outside month, despite monthly stochastics above 80%, indicating the market was already overbought.
As we approach the end of July, the spot-month contract is testing its last retracement resistance at the 67% level of $3,178. Note that the spot-month contract traded above this price earlier in the month, but now finds itself priced just below near $3,169. Also, monthly stochastics are above 95% with the faster moving blue line and slower moving red line converging. If light pressure is seen before trade for the month comes to a close, the cocoa market could see the establishment of a bearish crossover, indicating the major trend has turned down.
And as was the case with the uptrend, this could be another somewhat unusual example of the trend in futures leading the trend in futures spreads (second chart, green line). Notice that it was only after the major futures trend had turned up did the nearby spread start its journey into backwardation (an inverse situation). With the September contract now $22 over the December as monthly stochastics close in on a possible bearish crossover, market fundamentals could once again be in a follower role.
I find the developments in cocoa interesting, as they relate (in a way) to what we see in corn. When I discuss King Corn's monthly chart early next week take note of the trend (down) and monthly stochastics (oversold, below 20%). You will see that like cocoa did in February 2012, monthly stochastics for corn established a bullish crossover at the end of March 2014. From there the nearby futures contract almost rallied 33% of the downtrend from the August 2012 high of $8.43 3/4 through the January 2014 low of $4.06 14, coming up just short of the $5.52 mark with the May 2014 high of $5.19 1/2.
The difference between corn and cocoa is that while waiting for a secondary bullish crossover by monthly stochastics, the market has easily breezed to a new low this month of $3.56 1/2. Though it will be discussed in more detail next week, the corn market may still be months away from indicating a bullish change in its major trend.
Commodity trading is very complicated and the risk of loss is substantial. The author does not engage in any commodity trading activity for his own account or for others. The information provided is general, and is NOT a substitute for your own independent business judgment or the advice of a registered Commodity Trading Adviser.