Shorting July Cocoa on 1-2-3 Top Formation

Cocoa futures hit a multiyear high of 3047 on March 17th.  Prices haven’t been this high since 2011.   But they were higher in 2011, going as high as 3826 in March 2011 (see the Monthly Cocoa chart below).

Over the past few trading days, Cocoa Futures formed a 1-2-3 Top Formation (see Daily Cocoa chart below) and then broke below the #2 point of 2987 last Thursday.  We held off shorting this market to see if the vague-looking 1-2-3 Top Formation was going to develop into one that looked a little more sure of itself.  It didn’t.  Prices have been drifting lower over the past few trading days (see Daily July Cocoa chart below) and today, March 25, July Cocoa Futures are sitting at about 2948 (at the time of this post).  We decided to short this market now rather than wait and possibly miss our chance to maximize profits.

We bought a July Cocoa Put option with a strike price of 2850 (2 strike prices out of the money) for $740.00.  This Put option expires on 6/4/14.  On the Daily July Cocoa chart, you can see the 50% Retracement Level is 2801.50 so if prices don’t drop much further than that, we still can make a decent profit on this trade.  HOWEVER, on the Weekly Cocoa chart (see below) the 50% Retracement Level is 2542.50, giving us the potential for some nice profit if prices drop past the 2800 level.

Daily Cocoa - July 2014Weekly Cocoa FuturesMonthly Cocoa Futures

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