How To Trade The Cocoa Trend Reversal

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Cocoa prices have rallied substantially since I wrote How To Marry Fundamental and Technical Analysis in Cocoa.

Besides the spreads, I noted that there was a 1-2-3 Trend Reversal underway in Cocoa. Every trader wants to pick a bottom to go long. While I understand that to be emotionally appealing, you can lose a ton by getting cute. You can see in the FutureSource chart, by following the rules, that the financial rewards can be worthwhile if you can be patient. Let the market activity unfold and act accordingly.

FutureSource Cocoa Settlement prices as of April 27:

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When you compare Cocoa settlement prices from April 1 to April 27, you see that the spreads between contract months have come in also – they’ve narrowed.

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If the demand for cocoa rises enough, you may see the market for cocoa change from what’s known as a carry-charge market (aka contango) to an inverted or market in backwardation. That means that the front months will be higher in price than each successive month.

The significance is that backwarded markets demand immediate delivery of existing production as fast as possible. In contrast, carry charge markets suggest storage.

The 1-2-3 Trend Reversal rules were first delineated in Methods of a Wall St. Master, by Victor Sperandeo. The rules are not particular to Cocoa and can be applied to any market.

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