Grains Oilseeds

[Arctec]

COCOA STRATEGIES

In keeping with the temporary corrective posture that we talked about in the introduction, traders might consider the cocoa market to be vulnerable to near term corrective action. In addition to the cocoa market building its spec and fund long position to a lofty 51,000 contracts, it should be noted that the May cocoa market managed another $51 a ton rally into last week's highs, and that means the COT report might be somewhat understating the size of the spec long in cocoa. In other developments, it should be noted that recent arrival data has seemingly recovered and the severity of the supply shortfall seems to have been temporarily mitigated. However, in our mid December 2006 Special Report on cocoa entitled "Cocoa: The Sleeper Market of 2007," we predicted that cocoa would rally to $1,850 per ton on the back of generally tightening supply and demand considerations. So far, the secondary forces that we suggested could support a further rally to $2,100 and perhaps higher have not yet materialized. While recent demand indicators have been positive, they really haven't picked up any momentum. Therefore, we fear a moderate setback off a lack of fresh fundamental news. In addition to the recent COT report hinting at an overdone speculative condition, it should also be noted that the February 16th spike high was accompanied by a huge spike in open interest, and that suggests to us that the market has reached a temporarily overvalued level on the charts. Our pick for a "temporary" correction in December cocoa is a normal retracement off the January and February rally or a slide to $1,781, but a slide to the 50% retracement of that same move could also allow for a spike down washout to $1,759. Some players have suggested that a gap situation around the 50% retracement zone might need to be closed by a trade to $1,748 before the bigger picture uptrend pattern can resume. Longer term, we still expect demand growth to slowly chew down supply, as new consumers and favorable diet/health issues push cocoa into more diets throughout the world. In the event that adverse weather expands in the African production region, the La Nina impact somehow impacts Pacific production or Ivory Coast tensions return, it would not be difficult for cocoa prices to attempt a return to the 2002 range of $2,000 to $2,250.



Suggested Trading Strategy: 1) Longs in the May contract might decide to bank profits and wait for a correction in the December cocoa to $1,748 to roll forward. Use an objective of $1,890 and risk the trade to a close below $1,705. 2) Wait for a correction to $1,750 to buy a December cocoa $1,900 call for 110. Use an objective of 277 and risk the call to a close below 45.