Making History in the Cocoa Market - TheStreet

Wide-ranging bars and gaps on a price chart are usually significant events. But when a market makes the biggest single-day move in its

history

, it's a milestone that signals a major trend change is at hand.

May

cocoa

(CCK3:NYBOT) tumbled $217 a metric ton to $2,072 Thursday, eclipsing the previous record for a one-day decline that occurred just four months ago in October.

Cocoa has been climbing a wall of worry since rebels attempted to take over Ivory Coast last year. The West African nation is the world's largest producer of cocoa, supplying the globe with more than half of the beans used in the production of chocolate. Traders had been bidding the price up, worried about a disruption in the supply of the beans.

One method of identifying a change in the prevailing trend is to scout for an overbalance. As long as a market is in a trend, it usually displays symmetry in the pullbacks. The symmetry is, in fact, a kind of a dynamic cycle.

As long as the market remains in that cycle, the trend is intact. But once an overbalance occurs where the symmetry of the pullback is violated, that demonstrates that cycle -- the trend -- has been broken. The market then seeks a new cycle equilibrium, usually moving in the opposite direction.

Given the break in the uptrend, the strategy for cocoa now shifts to searching out opportunities to go short on pull-ups from lows.

Trend Confirmation

While price action in cocoa strongly suggests the uptrend is over, movement in March

T-bonds

(USH3:CBOT) on Thursday worked to confirm the continuation of the debt futures' trend higher. News and new fundamental information generally don't provide the entry, risk management and profit-harvesting specifics required for successful trading.

News, or more specifically, a market's reaction to the news, can be a good indicator of underlying sentiment. If a market tanks on positive news, it's demonstrating weakness. If it rallies on bearish news, that's a sign of strength.

The producer price index rose much faster than expected in January, at a 1.6% rate. Core rates, excluding the more volatile food and energy sectors, rose as well. The report is inflationary. T-bonds, trading at contract highs, should have sold off. They didn't.

Instead, they rallied to a new contract closing high. This price action bolsters

the view that T-bonds will break out of the big-picture ascending triangle and continue higher in reaction to previous signals of nascent momentum.

Marc Dupee is an independent trader and co-author of the book

The Best: Conversations With Top Traders. Dupee was formerly markets analyst and futures editor for TradingMarkets Financial Group. At time of publication, he held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he invites you to send your feedback to

Marc Dupee.

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