In a recent blog post we discussed the agricultural markets (corn, soybeans, & wheat) were beginning to exhibit improving relative strength characteristics when compared to their peers within the commodities sector. In this post, we will visit the exact opposite scenario and take at one of the soft commodities which is beginning to display signs of weakening relative strength.
Although not the most commonly discussed market, Cocoa futures have actually outperformed the majority of its peers (exceptions being Feeder Cattle, Live Cattle, & Zinc) over the last 9 months. In fact, the year to date performance (as of 10/27) is up 8.42%. However, as we mentioned above, recent technical developments are starting to show signs that this out performance may be coming to an end. We will keep consistent with our theme of looking at traditional point & figure charts to determine if any of the recent developments may give us an idea what the current supply & demand characteristics are saying.
Point & Figure: Cocoa (Dec 14 – CC/Z4)
The point and figure chart below displays a spread triple bottom break which was confirmed when Dec ’14 Cocoa futures were unable to find a bid at the previous area of demand near the 3080 level. Once price traded below the 3060 level, a new box was formed and confirmed the pattern which currently has a measured move target down at the 2740 level. Let’s think about that in terms of supply & demand. On the two previous attempts the market found a firm bid near the 3080-3060 level and held firm. On the most recent attempt, those same market participants did not show up as they have before and the supply (sellers) of the cocoa market overwhelmed the demand (buyers). Thus far the sell signal has been working quite well, with Cocoa futures trading sharply lower over the past 2 sessions and briefly touching levels not seen since May 2014. This is an example of a market which had been outperforming the majority of its peers and is now beginning to display signs of losing relative strength within the commodities asset class.
Conclusion:
The above blog post provides some insight on using traditional point and figure charts to help identify markets which were once outperforming the majority of their peers but is now showing signs of weakness. In the case of Cocoa futures, the spread triple bottom break which was confirmed on the move through 3060 as thus far ushered a sharp move lower. Time will tell if the measured move target of 2740 is met or not, but one thing we can confirm is that the supply & demand picture for cocoa prices has recent shifted in favor of the bears.
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