A Top In The Price Of Cocoa

On March 8th, I finally took profits and sold the rest of my holdings in iPath Bloomberg Cocoa SubTR ETN (NIB). In the past week, NIB came back down to my price and the ETN closed below my selling price to finish the week. I now think the price of cocoa, and thus NIB, has topped out for now.

Source: FreeStockCharts.com

The iPath Bloomberg Cocoa SubTR ETN (NIB) suddenly looks toppy. The three long red bars surrounding the last surge to multi-month highs have the look of sellers taking back control of the trading action.

Anatomy of a top
The topping action began with the deep pullback on March 19th that took NIB off the 16-month high at that time. Buyers stepped back in and were rewarded with a surge to new 16-month highs 4 and 5 days later. During that time, the Coffee and Cocoa Council (CCC) projected “Ivory Coast’s mid-crop cocoa output is expected to drop 23 percent this season due to insufficient rain and poorly kept fields” according to Reuters. The projected 400,000 tonnes is 120,000 tonnes short of 2017’s mid-crop production. I previously observed that the strong rally in cocoa was about cocoa forecasts coming up short of previous production numbers, so this news was not much of a surprise even if I had no expectation on specific numbers.

With cocoa up so much already, the classic trader concern is whether price action has finished pricing in the catalyzing news. The trading action following the news is often a good tell: if the price action reverses, traders do well to assume the catalyst has finished its work. Risk/reward dictates ending the trade with an easy re-entry if the price action resumes with a new high (or new low in a downtrend).

With the last surge to 16-month highs quickly giving way to downward price pressure, I think the answer is in: sell the news.

A top confirmed
Buyers had one last chance to prove that upside remained…and they failed. On April 2nd, NIB made a new intraday 16-month high but faded. Reuters reported that “speculators increased their net long position slightly to the highest since August 2016, showing less short-covering took place than some had expected, according to data that was released on Friday, when the markets were closed.” This speculative positioning is quite a turn-around from the record SHORT positioning that plagued cocoa in 2017. This high level of bullishness is a classic warning sign in commodity markets: it begs for a price reversal as increasingly supportive news is required to sustain the trend and supporting market sentiment. The release of the Ivory Coast mid-crop projections is that final news.

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Disclosure: no positions

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Michael Molman 3 years ago Contributor's comment

I have been bullish on #cocoa since January and made a nice bundle since then. However I have grown concerned that the current surge in price has been propped up by speculators and momentum following. With that I agree with your assessment that cocoa and $NIB has topped out.

Dr. Duru 3 years ago Author's comment

Yes. The momentum folks drove price down too far and now up too far. I guess somewhere in the middle, price will become boring again! Thanks for reading.