Cocoa/Sugar Spread: Only One Week To Switch From a Multi-Year High to a Two and a Half Month Low

The Second Short Sale This Month

Today the March cocoa/sugar (x2) spread closed below the September 3rd reaction low. It also made a two-day close below the rising 50-day Moving Average for the first time since January. This triggered a short sale reentry signal for the IMC blog. Therefore, a position was initialed at today’s closing price of +$2,318.80 (premium cocoa). Initially, the short position will be liquidated on a two-consecutive day close above +$7,728 ($500 above the contract high).

March Cocoa Sugar (x2) spread daily

March Cocoa Sugar (x2) spread daily

Recall that a short sale was initiated right before the Labor Day weekend when the spread broke support at a prior month’s low and the 50-day MA. It was then knocked out just over two weeks later when a new multi-year high was hit. In the last week, the spread has gone from a multi-year high to a two and a half month low. Hopefully, this whipsaw action and surge in volatility is indicative of an end of the bull market. Regardless, we are back on the ride so you better buckle up.

Where to Now?

Historically, a run to +$4,500 (premium cocoa) on the nearest-futures monthly chart is a rare event. This current bull market is only the fifth such occasion in the last four decades. Major bear markets followed the prior four events, so we see no reason that history shouldn’t repeat.

Cocoa Sugar (x2) spread monthly

Cocoa Sugar (x2) spread monthly

The smallest of the prior four bear markets dragged the cocoa/sugar (x2) spread down to approximately -$23,000 (premium sugar). The largest bear market sent the spread 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. Therefore, a minimum target of -$20k (premium sugar) seems to be a good initial target. Depending on the volatility and price structure, we may be able to add to the position and fully capitalize on the expected down trend. We will be posting more if anything noteworthy develops.

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