FREE Guide - 5 Chart Patterns You Need to Know!

Watch for the Breakout in Cocoa

December Cocoa futures (CC) traded as high as 3375 in July before falling to 2989 in August. The price has bounced off the low, trading at 3123 on September 3, but remains in a large consolidation in place since mid-August.

The drop to 2989 was a false breakout to the downside, with cocoa being aggressively bid up right after. The consolidation continues to narrow, with the price range since August 25 moving between 3148 and 3064. Eventually the price is the going to break this consolidation and result in a trending move.

Conservative estimates on the trend put an upside target at 3300 to 3325, in the event of an upside breakout. Given the deep retracement of the June/July rally, assuming the price will reach a new high may be a bit ambitious, thus the 3300 to 3325 target. 

While the price has had one false breakout to the downside a legitimate downside breakout can't be ruled out. In the event of a downside breakout the targets are 2900, followed by 2775. The latter target would require of drop of similar magnitude to what we saw in late July/early August.

Figure 1. December Cocoa Futures (CC) -Daily Chart

How the price action unfolds between now and the breakout will determine the stop loss points. Place a stop loss on short positions above the recent swing high, and below the recent swing low for long positions. Based on the entry, stop loss and target the reward:risk on the trade should be at least 2:1 in order to consider the trade.

Get This FREE Technical Analysis Guide!
Timing is everything, and with this guide, you'll learn how technical analysis can help find the right time to enter and exit your futures trades. Nearly 30 explanations and examples of the most popular technical analysis tools are all in this one handy guide. It's like having a futures trading mentor at your side!