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Watch Cocoa Futures For A Sharp Move

Cocoa is in a tug-of-war between the buyer and sellers, with the price confined to a tight volatile range. When it breaks out, there is likely to be a sharp and sizable move.

Since January 25 May cocoa (CC) has ranged between 2890 and 2738. The highs of the range have edged higher over the last week, only to be quickly reversed. Those are false breakouts, and combined with the downtrend those factors could favor a downside breakout.

For the downside breakout, a quick drop to between 2600 and 2585 is possible. In the event of an upside breakout we could get a quick pop to between 3000 and 3040. These approximate targets are based on the size of the current range: 2890 - 2738 = 152, added or subtracted from the breakout price.

Figure 1. May Cocoa Futures - Daily Chart

For trades like this it's better to keep risk quite small (stop loss not far from entry) as it may take more than one entry, and a couple small losses, before a sizable move happens. A similar scenario occurred in November and December when the price consolidated, had a false breakout in both directions but then ultimately crashed to the lows we are seeing now.

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