I have stayed out of cocoa recently. The trend ought to be down, given high expectations for the 2010-11 harvest, but robust global growth expectations and the political situation in Ivory Coast are supporting the market. Consequently I did not go short on the previous sell signal. I also did not go long on the previous buy signal, in December, which was caused by the beginning of the Ivorian political problems, taking the view that a disputed election was not a reason in itself to expect supply disruptions. Now, however, two things have changed. The current president, Mr. Gbagbo, seems to have no intention of leaving office despite a lot of pressure from, basically, everybody (the UN, the regional central bank, the West African Union, the former president of Nigeria, etc.). Military action by local states appears to be on the cards. All in all, the situation is both getting worse and looking more intractable. Most significantly, the EU has imposed sanctions. There were some reports that this would not affect cocoa exports (likely re-routed via Ghana), but the proof of the pudding is in the cocoa price, to mangle a metaphor, and the price has started to spike.

I was slow to trade this market, missing the first trading signal because I just thought “political, don’t trade.” But I think this was wrong. Another strong signal yesterday provides a reason to get in.

A look at the market personality page (bottom chart, below) shows that breakouts work well when cocoa is in an uptrend. Recently, when it has not been in an uptrend, the price is susceptible to sudden spurts upward and this is when breakout trades work. There could be an argument for not trading, on the grounds that I am trading the second breakout in a row, should have traded the first one, and should now wait for a pullback. But the propensity of the market to strong rallies argues otherwise.

I have put the stop below the low of the breakout day, at around 1.3 ATR, because I feel nervous. This may have been a mistake, given the arguments above. I traded last night and this morning the market is up.

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