Can cocoa’s recent surge withstand seasonal weakness?

agricultural, Charts, Commentary, News, Technical Analysis

Cocoa tends to begin a seasonal decline in early to mid-March through the end of May (shaded in yellow below), instituting a short position in our seasonal best-trade category. Selling on or about March 14, right before St. Patrick’s Day and holding until on or about April 17, for an average holding period of 23 trading days, has been a winner in 34 of the past 45 years. Even in the face of the 2008 great commodity bull-run, this seasonal trade worked with a potential profit of $1,730 per contract. Since 1997, this trade has only posted three losses.


Cocoa has two main crop seasons. The main crop from the Ivory Coast and Ghana in Africa accounts for approximately 70% of the world production and runs from January through March. As inventories are placed on the market, this has a tendency to depress prices, especially when demand starts to fall for hot chocolate drinks and chocolate candy in the spring and summer time. For most of last year, cocoa was essentially stuck in a trading range from around $1800 to $2200.

Cocoa broke out of this range, in dramatic fashion, just last week. Cocoa’s current run began in late December near the bottom end of its range and is now near $2500. A strong factor in the brisk run up has been unfavorable weather conditions in major growing areas in Ivory Coast (Côte d’Ivoire) and Ghana. Cocoa is now heavily overbought and sentiment is heavily bullish. These two conditions can result in a pullback or correction for cocoa in the near-term.

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Disclaimer: Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. Any decision to purchase or sell as a result of the opinions expressed in the forum will be the full responsibility of the person(s) authorizing such transaction(s). BE ADVISED TO ALWAYS USE PROTECTIVE STOP LOSSES AND ALLOW FOR SLIPPAGE TO MANAGE YOUR TRADE(S) AS AN INVESTOR COULD LOSE ALL OR MORE THAN THEIR INITIAL INVESTMENT. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.

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Jeffrey A. Hirsch is Editor in Chief of the Stock Trader’s Almanac. His latest book "The Little Book of Stock Market Cycles" (Wiley) was published in August 2012. As a frequent participant in the MrTopStep IM-Pro Trading Room, he shares trading insights with our other professional traders and new traders eager to experience the power of collective intelligence. Join us today and get the edge only social trading can give you.

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