Special Report


Special Report-Cocoa

April 14, 2020


It may not be my favorite market but over time I have found the Cocoa market to very interesting and at times worthy of a serious trading look.  It can have some pretty exciting price movements that seem to explode, both higher and lower. I think that may be because the various international fundamental factors.  Before we go any further I again provide key points that you may need inunderstanding my model and therefore the analysis.  If you have read them before you can skip down to where I discuss Cocoa.

All my comments are my OPINION and that OPINION is based on my long term in-house model that I dubbed LAWG 647. The prices I use in my model are week ending prices, usually Friday.

To help you better understand my opinions please be mindful of the following.

While I do not use the RSI to determine when a market is overbought or oversold I do refer to it because it is the one index I believe most traders are familiar with. 
It is my belief that a commodity will spend sixty per cent of the time within the First Standard Deviation of the long term average.  This happens when a market reaches Price Equilibrium where supply and demand are roughly equal. Secondly in my opinion it will spend about 30% of the time above the Second Stand Deviation.  This is tells us while in a wider price range of Price Equilibrium an imbalance is beginning to take place. Finally around 5% of the time give or take it will be above the above the Third Standard Deviation and beyond. This happens when the market has a definite directional bias and an imbalance is building.
As the Standard Deviations expand above the Third Standard Deviation they can become overstretched to a point where they signal Negative Equivalency or Positive Equivalency, a sign of being significantly imbalanced.  This is normally a sign to consider a counter trend trade.  
In extreme (rare) bullish or bearish situations both the negative and positive indicators can reach over stretched at the same time this is called Dynamic Separation.   According to my model the Sugar market has entered Dynamic Separation and that is why it is my topic for the day.


In general day to day the Cocoa market is impacted by aninteresting variety of fundamental factors.  Since most of the world Cocoa is consumed outside of the Cocoa growing area international factors play a greater role in Cocoa values than perhaps other commodities. The fundamentals that are presently impacting Cocoa:

A protracted hot and dry period earlier this year
Port deliveries lag behind last year
With Covid-19 laying on top of the world equity markets understanding the daily direction of the world equity markets is critical
Are world currency values were supportive
Covid-19 damaged holiday  Chocolate demand
Hope that nations coming back on line will boost the Cocoa demand


We know that July Cocoa has been in a confirmed downtrend for the last four weeks
We know that it will take a close this Friday, April 17 of 2904 to reverse the trend
We know it will only be marginally easier for Cocoa to reverse the trend the three weeks following
We know that the RSI is at 40 as I am writing this article
We know that the Cocoa market is negatively unbalanced
We know that the model has shown the Negative Indicator to be in Positive Equivalency (see above)
Once in Positive Equivalency Cocoa did rally 146points and then backed off a bit
Cocoa remains unbalanced and model suggest one patiently look for level to buy


What to do?

Once a market enters Positive Equivalency under the old normal it was not unusual for that market to work back to a balanced situation. In the old normal this usually took three to five weeks to achieve.  This does not happen all at once, and could be a bumpy ride.  It is not unusual to see said commodity slip back close to Positive Equivalency before working higher again. I think the Cocoa market is trying to determine if it will slip back close to Positive Equivalency or will continue to work back to being in balance.  Ergo be I am suggesting one be patient when looking to buy.  

So where to Buy?

Once again I enlisted the thoughts of my partner Steve Erdman who is also an Inside Futures contributors.

Steve Erdman 2252

Lee Gaus 2230

My name is Lee Gaus and if you would like to see more of our thoughts go to our website ifgfutures.com. There you will also find articles written by my partners Tom Fritz, Steve Erdman. If you have any questions you can reach me at 1-877-304-1369, 312-384-1166, or email me atlleegaus@efggrp.com. If there is a commodity you would like me to address dont be shy shoot me an email.

There is significant risk involved in trading futures and/or options on futures. Futures and/or options of futures trading may not be suitable for all investors. Investors should consider these risks and evaluate their suitability based on their financial conditions. Past performance is not indicative of future results.