Cocoa Strength Due to the Ebola Virus? Absolutely…Not

Over the past few weeks I’ve seen numerous people comment that the recent strength in cocoa prices is due to the Ebola virus in Africa and other places in which cocoa is produced. Me, being a natural skeptic, decided to check it out and figure out whether or not these two actually had real correlation or relationship whatsoever. What I found was well, not surprising in the slightest.

Below is a daily chart of cocoa futures over the past two years. I’ve added a 200 day simple moving average to help us identify the long term trend over this period. Clearly, with a rising moving average, the trend is higher and has been higher since the uptrend confirmed with a series of higher lows and higher highs in August of 2013.

Cocoa

Given the hypothesis that cocoa prices and Ebola are related, we should have no trouble finding news articles written on Ebola in 2013 when cocoa confirmed its uptrend in price, right? As you can see by the picture below, which is a google search of news articles related to ebola from March of 2013 to August of 2014, there are, well, barely any hits during that time period.

Ebola 1

Now lets expand the search to September 1st 2014, and see how many hits we get.

EBOLA 2

As you can see, there were hundreds of articles written about Ebola during the past month. Well, since cocoa prices are up during the one month period in which the Ebola virus became the news story of the year, clearly they must be connected right? No, not at all. Cocoa prices have been trending higher for the past year and a half, well before any of us new what an Ebola was. Just because something looks like it may be correlated, doesn’t mean it actually is.

Now that we’ve settled that debate, I invite you all to go back to caring about stuff that actually matters when valuing asset prices, like supply and demand. At the end of the day, saying cocoa remains in a strong uptrend is a lot less sexy than talking about why cocoa is a buy because of suppliers in Africa are being affected by Ebola. But, as market participants our main concern is making money, not about getting page views or press for what sounds like a cool story.

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False Breakout in Yahoo?

Ahead of the Alibaba IPO we’re seeing a possible false breakout develop in YHOO. Long term (15-20 year) resistance is in the $44 area and we are back to that level as of this week. Currently, we’re seeing a pickup in volume that is possibly signaling a reversal lower may be near. For a stock to have such high volume and price to move sideways, and in this case lower, is not a bullish sign IMO. Additionally, momentum is not confirming these new highs and price is extended from its intermediate term trend, as quantified by the 50 day SMA. Additionally, today in the options market we saw a relatively large risk reversal trade put on ~3500 times as the trader sold the Oct 47 calls to help finance the purchase of a 42-37 bear put spread.

All these factors combined, along with the hype of the BABA IPO tomorrow could lead to one heck of a false breakout. Bulls do not want to see the stock close below this $41 or things could get ugly.

YHOO

When Small Cues Add Up

Today I want to highlight the importance of being aware of technical cues that can play a role in anyone’s risk management process, regardless of their time-frame. Use of TA is essential if you’re an active manager or trader because it introduces risk management to your process and allows you to manage entries and exits more effectively. This does not mean that with technical analysis we suddenly have a crystal ball that allows us to top and bottom tick every exit and entry, but it does allow us to notice when conditions are changing and more importantly, when the risk/reward is no longer in our favor.

I want to use the example of LinkedIn because the stock sold off significantly on Monday and has remained relatively weak since. As the chart caption states, my stance on LinkedIn changed significantly, at least for the short term, on 9/11/14 because of a few key factors.

LNKD

On September 11th, I noted that the risk/reward in LinkedIn was changing and that it was a good opportunity to clean up longs or try a short as the risk on the short side became clearly defined.

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Daily Trading Journal 9/3/14

Today the major indices saw outside day reversals with small caps and the Nasdaq 100 leading to the downside with bear engulfing candles. We remain above the 10 day SMA but a day like today in which price failed to hold above yesterday’s highs and closed near the lows of the day, signals that its time for active traders to take some risk off. This shouldn’t have been a real surprise given that we’ve just had three weeks of upside and were up roughly 6% off the August lows. At some point its clear that there are a lot less long setups that look ready to go so it’s only natural that we correct through price or time to allow things to set up again. Anyway, the bias remains higher in the intermediate term, but I expect some further weakness and volatility into next week. The VIX continues to try to build a base above $12 as the 10 day SMA is now rising below it to provide support. Resistance remains at $13.50. Bonds (TLT) put in a bull engulfing candle and closed below the 10 day SMA and gap resistance at ~$117.50. Bias remains higher in the intermediate term as long as we are above trend line support and the 30 day SMA. Global equity markets were largely higher on the day with Argentina (ARGT) up 3.18% and South Korea (EWY) leading lower down 0.24%.

Sectors leading to the upside included solar stocks (TAN), steel stocks (SLX), coal stocks (KOL), gaming stocks (BJK), utilities (XLU), healthcare (XLV), and oil services / energy (OIH, PXJ, XLE).

Sectors lagging on the day included homebuilders (XHB), small caps (IWM), IPO’s (IPO), shippers (SEA), the Nasdaq 100 (QQQ), large cap tech (XLK), transports (IYT), and regional banks (KRE).

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Daily Trading Journal 9/2/14

Today the major indices saw an uptick in volatility and closed mixed on the day after a choppy session. Small caps and the Nasdaq 100 led while the Dow and S&P 500 closed slightly down on the day. The bias remains neutral/higher as we remain above a rising 10 day SMA in all the indexes, but a a more tactical approach is likely better for short term traders given the move we’ve had in the past few weeks. Additionally, a lot of charts could use time to set back up again before moving higher. Bonds (TLT) saw their first potent down day in a while which gives reason for some caution here. Intermediate term trend remains intact as we are above a rising 30 and 150 day SMA, but we may see continued weakness in the coming days as we broke the 10 day and closed on the lows of the session. Global equity markets were mixed on the day with India (EPI), which looks great on the long side, led up 1.54% and Greece (GREK) lagging, down 2.4% on the day.

Sectors leading to the upside included the transports (IYT)< telecom (XTL), regional banks (KRE), social media stocks (SOCL), small caps (IWM), and financials (XLF).

Sectors lagging on the day included gold miners (GDX), gaming stocks (BJK), oil services and energy (OIH, PXJ, XLE), utilities (XLU), steel stocks (SLX), and semiconductors (SMH, SOXX).
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