Cocoa has had a nice 300 point, 17% rally since the August 16 low of 1830.
While we like the price action, and longer term charts are turning bullish. we see a nice setup for a scalp on the short side. Let's take a look at the setup.
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We can see the price action exhibiting constructive Higher Highs and Higher lows during this recent up-leg. However, whenever we see a Long candle on very heavy volume, the heaviest volume during the entire price advance, occurring after a sharp price movement, this signals short term distribution. We now begin looking for top, even if it is only short term. We can see the next day, a top was put in, and we are now backing off those highs.
The next piece of evidence lies in this week's COT report.
Here we see that during the past week, Commercials sold over 10k futures contracts. This added to their selling during the last 4 weeks, which totals over 24k contracts sold. So over the past 4 weeks during this rally Commercials have gone from a Net Position of long 18k contracts, to now being short 6k contracts. This 4wk change scores a horrible 1% on a 18m basis, showing us how aggressive the selling has been.
Cocoa price distribution odds on average, as well as in the 70th + 80th percentile over a 20 Trading Day interval is 1:1. Meaning prices tend to move up or down from any random close by the same increment.
However, lets look at price distribution when Commercial 4wk delta in positioning scores less than 5% as we have evidenced this week.
Average price distribution in now 2.36 to 1 in bears favor, and the 70th + 80th percentile moves are now 23up by (95) down and 20up by (75) down respectively - for odds of 4:1 in bears favor! This is a significant edge to bears given the condition.
Cocoa has had a terrific run, but we are witnessing aggressive selling by commercial traders into this rally. It's time to take profits or scalp a trade on the short side here with 4:1 pot odds in our favor.
A quite normal 50% retrace of this rally, takes you down to the 2,000 price area, while you can use a 2 bar hourly close over the recent highs @ 2,160 as your stop. This offers 115 of profit potential vs 45 of downside potential for a R/R of 2-1.