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Traders Not Souring on Sugar

Posted by Futures on January 26, 2010 9:48 AM

Fundamentals

Sugar futures are higher in overnight trading, on expectations that demand for the sweetener will remain robust for the foreseeable future. The fact that India has had a relatively dry monsoon season indicates that the world's largest user of Sugar will continue to ramp-up imports to deal with demand and output shortfalls. Brazil is also experiencing weather concerns on the other end of the spectrum, with too much rain possibly cutting output. Buyers are also racing to secure supplies. Indonesia is currently negotiating the purchase of 181,000 tons of Sugar. Pakistan, Egypt and Mexico are also moving to secure supplies. Despite the overall weakness seen in commodities lately, the Sugar market remains resilient because of the strong fundamentals. In the short-term, a stronger Dollar and weaker commodity prices could put a damper on the Sugar rally, despite the strong fundamentals, as commodity funds could see clients moving capital out.

Trading Ideas

Given the strong fundamentals, the Sugar market seems to favor the bull camp in the long term. However, the Dollar seems to be gaining some momentum, which could limit traders' appetites for commodities in the near-term. Also, the chart remains very bullish for the March Sugar contract, but the oscillators hint at possible near-term weakness. For these reasons, some traders may wish to consider putting on a bull call spread, buying the March 29 calls (SBH029C) and selling the March 30 calls (SBH030C) for a debit of 0.30, or $336. The trade risks the initial investment for a possible profit of $784.

Technicals

Turning to the March Sugar chart, we see prices breaking out of the triangle patter, making the measured move. The combination of making the measured move and near overbought conditions on the 14-day RSI could put pressure on the Sugar market in the near-term. The 20-day moving average may be a level that traders focus on going forward, as the market rebounded strongly the last two times the average was tested. A violation of the average could be a sign that the market could move lower in the short-term. Momentum is diverging from both price and RSI, hinting at near-term weakness.

Rob Kurzatkowski, Senior Commodity Analyst