Technical Tuesday: Cocoa

This analysis is as of 5/20/2024

Cocoa has, what appears to be, a clear 5-wave decline.? This is significant because whenever you get an initial 5-wave move in a new direction, you are almost guaranteed another new price extreme in that same trend’s direction.? This is because the only Elliott Wave patterns that start with a 5-wave subdivision are impulses, diagonals, and zig-zags.? These patterns almost always make new price extremes in their subsequent waves.?

Looking at the 15-minute chart, we can examine the substructure to gain confidence in forecasts.? It helps adjust the probabilities of what is possible and more probable.? Here, since we can count out a completed pattern, we know that all the minimum requirements are met for a completed pattern.? This increases the probability we will get a trend change.?

If this first wave down is complete, where are we going now?

The most probable path would be for prices to zig zag higher in a 3-wave move that targets the 50-62% retracement levels.? These levels are at 9245 and 9829, respectively.? Often, this type of correction will target the subwave 4 of (3).? That is at 9480.? Thus, there is a cluster of targets in the 9245-9822 range.

If this market does follow the proposed script, it will shift the probabilities in favor of another large decline of at least $5,000/ton, targeting the $4480 level.?

One concern is that cocoa is very similar to Orange Juice in that they both have very concentrated areas of production, those areas have real issues with crop health and both have a slow expansion cycle as the trees take years to produce yield.

Below we can compare OJ and Cocoa.? OJ had a very similar sharp decline back in late 2023, but now has recovered to new highs.?

If/when this cocoa market rallies back up above $9,000, it will be important to note substructure (3 waves or 5 waves) along with other indicators to judge whether cocoa will end up like orange juice or if that rally will be a once in 10-year put buying opportunity to have downside participation in any cocoa that was procured.?