Buyers Beware: Cocoa’s Epic Rally Falters

From the Desk of Ian Culley @IanCulley

Danger Will Robinson, Danger!

Cocoa futures have violated a parabolic trendline. 

And it may not be safe for bulls to hold their long positions…

Cocoa fell -2.50% on Monday, cementing last week’s trendline break.

Commodity markets tend to experience steep selloffs following dramatic rallies. Escalator up, elevator down.  

But buyers are refusing to throw in the towel here. In fact, Monday’s potential top is yielding a fresh 46-year high today – not bearish.

I will not short those new highs. Nevertheless, I want to prepare for Cocoa’s eventual decline.

Check out the March contract:

For now, 4094 marks the line in the sand. A break below that level flashes a sell signal. But only if today's run-up in price fails to hold.

My bias remains higher toward 5000 (key extension level) as long as cocoa trades above 4343.

On the other hand, I’m ready to get short on a decisive breakdown with an initial target of approximately 3400 (the Oct. ‘23 low) and a secondary objective of roughly 2900.

The zoomed-out weekly chart highlights our secondary target, coinciding with a critical breakout level:

To be clear, a sell signal has yet to trigger for cocoa futures.

But the uptrend is maturing and looking a bit top-heavy. (I can relate, celebrating my 43rd birthday yesterday.)

Cocoa futures will fall. It’s simply a matter of time.

You now have clear levels to trade against. And I’ll be sure to update my priors and our risk levels if the market continues to run.

Stay tuned!

COT Heatmap Highlights

• Commercial hedgers scramble to buy corn, adding more than 68,000 contracts over the trailing four weeks.
• Commercials posted their largest long position for Minneapolis spring wheat in history.  
• And commercials hedgers hit a three-year record-long position for soybeans, piling on almost 20,000 contracts last week. 

Click here to download the All Star Charts COT Heatmap.