Cocoa price forecast: buy the dip or sell the rip?

Cocoa price has suffered a dramatic reversal in the past few days. After shocking the world with a remarkable surge that pushed it to $12,253 in April, it has now plunged by more than 37%. It was trading at $7,658 on Friday morning.

To be clear: cocoa is still one of the best-performing commodities this year even after shedding over 37% of its value. It has soared by almost 90% from its lowest level in January and by 265% from its lowest point in 2020.

Cocoa price, as I have written before, jumped because of the general supply and demand mismatch. Demand has been rising sharply globally, helped by the expanding middle class and more consumption in Asian countries.

At the same time, most cocoa-producing countries have faced numerous challenges that have affected production. The first important issue is that cocoa was a loss-making crop for a long time, which led to underinvestment in key countries.

As a result, our visit to Ivory Coast and Ghana showed that most cocoa trees were old, which affected their yields. At the same time, there have been some issues with the weather and diseases, especially in Ivory Coast. Just recently, there was a big fire in a cocoa farm in Nigeria, another top producing country.

Cocoa is different from other crops like corn and soybeans because it is only produced in a few countries. As such, other countries can’t enter the industry because of climate and soil factors.

Also, cocoa trees take a few years to start generating produce. Therefore, while many farmers in Ghana and Ivory Coast are now rushing back to the industry, the impact of this production will be felt in the next five to seven years.

Cocoa price also surged because of hedge funds and traders, who have allocated billions of dollars in the industry. Now, the ongoing crash is happening as these participants wind down their trades. 

Cocoa chart by TradingView

Turning to the weekly chart, we see that the price of cocoa peaked at $12,253 last month. It has now dropped in the past two straight weeks, as I predicted. This week alone, cocoa has plunged by about 30%, its worst performance on record. 

The Relative Strength Index (RSI) has crashed from the extreme overbought level of 96.4 to about 53. The same is true among other oscillators like the MACD and the Stochastic Oscillator.

This retreat is happening because of profit-taking among investors who have made a fortune during the rally. It has also entered the mark-down phase of the Wyckoff Method, which is characterised by more selling than buying.

Therefore, the outlook for cocoa is bearish with the next point to watch being at $7,000. However, I suspect that a brief comeback will happen in the next few days in a process known as a dead cat bounce.

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