Soft Commodity Update: Warning Signs Take Shine Off Momentum

As the table below shows, the short-term momentum on key agriculture commodities is predominantly still pointing higher, but a couple of warning signs have emerged. That is especially so in the soft sector where the recent recovery in both coffee contracts has been running out of steam and also both cocoa contracts which have been witnessing a strong build in net-longs by hedge funds over the past couple of months.

In cocoa this has resulted in the net-long positions as of November 26 reaching a size which would require six days of average volumes on Ny Sugar and five days on London cocoa to close down. Both contracts are down around two percent today with Ny Cocoa now looking for potential support at USD 2,700/tons, the 50 percent retracement of the November rally.

Coffee prices have come under some renewed selling pressure with Robusta reversing most of the seven percent gain seen since yesterday afternoon when the market reacted to news about a slump in stockpiles after exports from Vietnam fell by one-third during November. Arabica coffee earlier today reached the highest level since October 25 but has since succumbed to selling resulting in a loss of one percent. The technical picture could indicate that the bounce since early November now carrying the risk of turning into a bear-flag which could signal a return to the lows and beyond.

Sugar remains firmly in the negative momentum camp after having dropped non-stop since October with losses seen in 25 out of the last 27 trading days. As we approach the July low at 16.7 cents per pound, some support may emerge, not least considering the current oversold reading on 14 days RSI at 19.4. Hedge funds long liquidation has been the main driver during the last month as net-longs have only slowly been scaled back. A break to a new low on the year may trigger some additional capitulation but for now a low RSI reading and the July low may offer some support.