(CCN24) (CCU24) (CCZ24) 

(CAN24) (CAU24) (CAZ24) 

“Calling the historic price collapse in cocoa”

by Jim Roemer – Meteorologist – Commodity Trading Advisor – Principal, Best Weather Inc. & Climate Predict – Publisher, Weather Wealth Newsletter 

MAY 1, 2024

A few weeks ago, it became obvious to me that buying cocoa on a 400% rally would be a huge mistake and prices might soon mimic what happened during the “Tulip Craze” in the 1600s. Dutch Tulip trading is the first well-documented speculative commodity bubble. The same thing has just happened to cocoa prices.

W h e n    t o   s e l l   a    p a r a b o l i c    c o m m o d i t y    m o v e ?

In order for me to justify entering a short position in a rising futures market, I need to see a change in the “fundamentals” of the particular commodity, ahead of time

  • For cocoa, this is the time of the year that the smaller West African Mid-crop hits the market. This often results in hedge fund selling occurring ahead of and during harvest. 
  • Most of the bullishness in cocoa was already built into prices. 
  • I have been preaching this to my newsletter clients for a couple of months: That the “seasonals” would ultimately become bearish for cocoa.
Source: Moore Research Center, Inc. (MRCI)

Below, are four examples in which the weather, or other fundamentals, caused a major collapse in commodity prices. Parabolic moves often last less than 6 months. Such was the case in cocoa.

Below are some of the technical indicators to call potential tops in markets. This is extremely sophisticated. Typically, I use fundamental analysis when the 5-day moving average goes above or below the 20-day moving average (see cocoa, below).

  1. Look for Divergences:
    • Examine indicators like RSI, MACD, or momentum indicators for divergences between the price action and the indicator.
    • When the price is making new highs but the indicator fails to make a new high, it can signal the parabolic move is losing steam.
  2. Identify Overextension:
    • Use technical tools like Bollinger Bands or standard deviation channels to identify when the price has moved too far, too fast, and is becoming overextended.
    • Parabolic moves often reach levels 2-3 standard deviations above the mean, signaling a potential reversal.
  3. Examine Volume Patterns:
    • Look for a sharp drop-off in trading volume as the parabolic move progresses. (This began in cocoa three weeks ago)
    • Declining volume can indicate waning enthusiasm and buying pressure to sustain the move higher.
  4. Apply Fibonacci Retracement Levels:
    • Draw Fibonacci retracement levels (23.6%, 38.2%, 61.8%) from the start of the parabolic move.
    • One of these common Fibonacci retracement levels is where significant reversals often happen.
  5. Watch for Blow-Off Tops:
    • Identify capitulation-type price spikes with extremely high volume at the end of the parabolic move.
    • These “blow-off top” patterns can signal the final exhaustion of buyers before a sharp reversal.

Bottom line (WRITTEN APRIL 8TH): “A change in fundamentals and the 5-day moving average going below the 20-day often signal a major trend-change. It is possible that (based solely on history) cocoa prices will peak soon (or have just peaked) and enter a deeper bear market in 2024-2025. This would be especially true if La Niña results in a slight surplus of cocoa next year.” 

Nevertheless, prices have sold off too quickly to justify selling the market at these prices. Early on Tuesday (4/30), WeatherWealth clients were advised to take potentially huge profits on recent short positions. BUT short call options and longer term (limited volume) make sense.

Feel free to download a complimentary issue of WeatherWealth here:  https://www.bestweatherinc.com/new-membership-options/

In early April, the issue addressed parabolic moves and how to navigate them. If interested in joining expert and novice commodity traders around the world who want better weather information and trading ideas, please request our free 2-week trial period to the WeatherWealth newsletter.

Thanks for your interest in commodity weather!

Jim Roemer, Scott Mathews, and The Weather Wealth Team 

Mr. Roemer owns Best Weather Inc., offering weather-related blogs for commodity traders and farmers. He also is a co-founder of Climate Predict, a detailed long-range global weather forecast tool. As one of the first meteorologists to become an NFA registered Commodity Trading Advisor, he has worked with major hedge funds, Midwest farmers, and individual traders for over 35 years. With a special emphasis on interpreting market psychology, coupled with his short and long-term trend forecasting in grains, softs, and the energy markets, he established a unique standing among advisors in the commodity risk management industry.

Trading futures and options involves a significant risk of loss and is not suitable for everyone. Past performance is not necessarily indicative of future results. There is no warranty or representation that accounts following any trading program will be profitable.