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Are Traders Losing Their Sweet Tooth?

Posted by Futures on September 22, 2009 10:16 AM

Fundamentals

Sugar futures have largely been trading sideways since the beginning of August, due to mixed fundamental data. Global supplies of the sweetener have been extremely tight, but growers, such as Brazil, have been trying to increase output to compensate for the miniscule Indian crop. However, Brazil is now running into weather concerns of their own, as intermittent rains are beginning to interfere with the harvest. Analysts have increased the forecast size of the Australian crop, which could put some pressure on the Sugar market in the near-term. Indian monsoon rains have provided some hope that the Indian crop will be able to rebound, but there are whispers suggesting that the crop may, in fact, come in smaller than expectations. The bumper crop in Brazil may be able to compensate for a smaller Indian crop. Overall, Sugar market fundamentals seen to have weakened in recent weeks, suggesting further consolidation or possibly price weakness.

Trading Ideas

Some traders may possibly wish to remain on the sidelines until the Sugar market gives some sort of sense of direction. Given the extreme volatility the market has seen for the better part of the year, some neutral strategies may not be feasible. The premiums may perhaps be too great for long straddles and strangles, while the potential for extreme moves may make short straddles and strangles too risky. Some traders may decide to wait for the head and shoulder top to confirm before entering a short futures contract.

Technicals

The March Sugar chart shows the market could possibly be topping. There are signs that the chart may be in the midst of forming a head and shoulders top pattern, which if confirmed, could send prices falling into the mid-teens. The pattern is still a way off from being confirmed, but this is something some traders may wish to keep an eye on going forward. Trading has taken place just below the 20-day moving average for most of this month, which can be seen as resistance. The inability of the market to move above the average may be a sign of weakening technicals. The 50-day moving average is without earshot at current prices, suggesting the market may test the average in upcoming sessions.

Rob Kurzatkowski, Senior Commodity Analyst