Short covering rally sets speculative bull trap in cocoa
Despite continued strong arrivals and signs of record West Africa main crop, cocoa prices turned higher over the past week in technically-led trading. Arrival figures from Ivory Coast through the end of March are approaching 1.7 MMT, well ahead of historical norm. The Harmattan is ending, and weather has not been a bullish factor. So, overall, production is looking quite good from a fundamentals perspective, yet cocoa prices have rallied $250, up 10 percent over the past fortnight.
The key to the rally appears to have been a growing yet vulnerable speculative short position that began in March. Industry was looking for opportunities to extend buying, while origins were largely on the sidelines.
The major feature of trading activity was the increased spec fund selling. After breaking above the 200-day moving average and the downtrend, shorts began to cover and head for the exits, accelerating prices to the upside in a classic short-covering rally (bull trap). Fundamentally, there is little present news to justify the rally, and the logical expectation would be for prices to settle after the commotion dies down. The higher prices will likely prompt origin forward selling that could weigh on the market as they look to take advantage of higher prices.
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