Chart analysis test on Cocoa

How would you analyze this chart?

Last week’s homework question seems to have been a big hit as I got a ton of emails with your trading strategies and I have to say I was very impressed by your analysis! Some of you even spotted things I didn’t consider. Because of the volume I’m not able to respond to all the emails – but if you have any questions please send them via a separate email and I promise I will answer in a timely manner.

Most of you were inclined to buy Cocoa higher and that would be my inclination as well. A couple of you suggested bracketing last week’s trading range and letting the breakout decide – and given that the market was VERY sideways (ie. one inside bar after the next) that is also a good strategy to follow – and the one I didn’t think of.

Regardless of which tack you took, it looks like we would have been filled on a long trade as Cocoa prices rallied off support last week; however it’s still shy of where many of you would have placed your profit targets – mine included.

Chart analysis test on Cocoa

Here’s my analysis on the chart above:

1. Cocoa bulls managed a new high, breaking the prior swing high. Normally when the market breaches a significant swing high (low) we can anticipate at least two moves in the direction of the breakout. This was move 1; the bulls owe me one more rally. In most cases the buyers will try to recover the market near where the breakout occurred but in this case it made a rather deep retracement – that’s Cocoa for you, always unpredictable!

2. Cocoa bears broke the uptrend line and then stalled. IF this current rally from last February was nothing more than a great big Bear Flag there would have been more follow through on the breakout to the downside. That would show us that the sellers have control of the market, but instead the selling stalls and we even see support come into the market!

We had four days in a row trading within a 60 point range, which is tight, especially by Cocoa standards. This tells me there is either a) aggressive buying holding off the sellers, or b) no interest in selling below here. Either way it is bullish.

3. The prior support zone coupled with April’s small gap would be my profit objective, and at least two of you agreed with my target. However I would be quick to adjust the profit target if it looked as though the sellers were going attempt another push lower. In fact the sellers did attempt another move lower last Thursday, May 26th, but they failed. This confirms the notion that there is active buying going on around the 2900 (July) price level and as such the buyers seem to be in control, at least for now. This is also where my exit stops would be.

So well done to all of you who submitted an answer! I hope you found it educational. Want to play again? This time we’ll look at the Japanese Yen.

Analyze this yen chart

Questions for you to consider:

1. Would you say this market is more bullish or bearish? Why?
2. Based on your answer to #1, where would you expect prices to go to next?
3. Do you see anything tradeable here?

Give it some thought and let me know what you see.


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