Traders Await Their Next Sugar Rush
Fundamentals
Sugar futures have been a dream market for swing traders the past several months, as prices with both bullish and bearish short-term moves have become a regular occurrence. It appears that the recent price action is part of a larger price consolidation pattern that is occurring, after a nearly year-long bull market. Fundamentally, the market still looks bullish, as world supplies remain tight, and the International Sugar Organization expects the world stocks-to-usage ratio to fall to 32%, down 5% from last year, as production deficits spill into next year. India, the world's largest Sugar consumer, is not expected to limit Sugar imports, which is deemed supportive to the market. However, with Sugar prices more than doubling since October of 2008, it should come as no surprise that a much needed correction was overdue. Since the recent highs were made back in September at 26.25 in the March futures, prices have fallen nearly 20%, as large speculative trend-following accounts began to lighten-up on their long positions. According to the most recent Commitment of Traders report, large non-commercial traders shed nearly 25,000 contracts of their net-long positions in Sugar during the week ending November 9th, to now stand at 136,406 contracts. The sideways to slightly lower near-term price trend is not what these trend-following traders want to see, so funds are moved out of the Sugar market and into markets where established trends are still in force, such as Gold or currencies. Ultimately, this could be beneficial for traders awaiting a breakout in the Sugar market, as once prices move out of the recent price range, fresh interest from trend-following accounts should make its way back into Sugar and allow those holding positions to take advantage of such a move to, hopefully, reap the rewards for their patience.
Trading Ideas
Since Early September, March 2010 Sugar has been trading in a 5-cent trading range. Prices are now currently near the middle of this price range, with lower highs and higher lows being made. Traders expecting a breakout of the recent price range who are not sure in which direction the breakout will occur may wish to investigate purchasing strangles in Sugar options. An example of this type of trade would be buying the January Sugar 24.50 calls and the January Sugar 21.50 puts. With March Sugar futures trading at 23.24 as of this writing, this strangle could be purchased for about 0.90, or $1,008 per strangle, not including commissions. The premium paid is the maximum potential loss on the trade, with a profit at expiration in December, should the March futures be trading above 25.40 or below 20.60.
Technicals
Looking at the daily chart for March 2010 Sugar, we notice prices have been trading in a much narrower range the past few weeks. Prices continue to hover on both sides of the 20-day moving average, but seem to be holding above the longer-term 100-day moving average, which would favor the long side of the market. The 14-day RSI has turned up, but is still in neutral territory with a current reading of 52.32. The next resistance level is seen at 24.00, with support found at 21.78.
Mike Zarembski, Senior Commodity Analyst
