Can cocoa’s recent surge withstand seasonal weakness? By: Almanac Trader | March 7, 2018
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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