Cocoa/Sugar Spread: Is the Bull Market Finally Over?

Bearish Trend Change?

Last week the December-October cocoa/sugar (x2) spread made a two-day close below the rising 50-day Moving Average for the first time in over seven months. Furthermore, the spread broke below a prior month’s low for the first time since January. This altered the bullish price structure and triggered a bearish trend change signal.

Dec-Oct Cocoa Sugar (x2) spread daily

Dec-Oct Cocoa Sugar (x2) spread daily

The IMC blog initiated a short position on September 4th when the spread between the value of one December cocoa futures contract and the sum of the value of two October sugar futures contracts closed at +$6,435.20 (premium cocoa). Initially, the exit strategy is to liquidate the spread on a two-consecutive day close above +$8,345.

Looking Ahead

Over the last forty years, there were only four other times when the nearest-futures cocoa/sugar (x2) spread rallied above +$4,500 (premium cocoa) on the monthly chart and then rolled over. The smallest bear market that followed pushed the spread down to just below -$23,000 (premium sugar) and the biggest bear market that followed pushed the spread down to -$75,600 (premium sugar). The sizes of the bear market declines from top to bottom were approximately $104k, $39k, $32.7k, and $47.3k. So if this really is the end of the multi-year run higher, we have a lot of room to build up a short position to take full advantage of the coming bear market.

Cocoa Sugar (x2) spread monthly

Cocoa Sugar (x2) spread monthly

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