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Sugar High

Posted by Futures on June 15, 2010 7:37 AM

Fundamentals

Dollar weakness has helped support the slumping commodities market in recent sessions, leading to the 5-day rally in Sugar. The inability of the Sugar market to take our early May lows near the 14.00 level has led to short covering. Supplies of the sweetener remain tight, but could be aided by a strong Indian crop this year. This could result in lower Indian imports and less stress on global supplies. Also, the Brazilian crop season has started off very strongly, indicating the upcoming crop will eclipse the previous crop year. This, however, impacts the Sugar market down the road. In the near-term traders may continue to focus on tightness in the cash market and improved economic sentiment. Global equity markets have breathed a collective sigh of relief due to the lack of distressing European news. This has contributed to the renewed enthusiasm in the commodity markets. This has had a double positive effect on the Sugar market. Not only are traders a bit more enthused about the prospect of economic growth, but the US dollar has taken a hit due to traders are not as risk averse as they were just a couple of weeks ago.

Trading Ideas

The fundamental outlook for the Sugar market has improved with the weakness in the greenback. The short-term supply tightness and attractive cash market prices may continue to support prices and provide a near-term basement for prices. The double bottom pattern on the daily chart has been confirmed, albeit on the lightest volume in over a week. The light volume may temper the bullish sentiment created by the confirmation of the reversal pattern. Traders may wish to buy an October futures contract on a second close above the trigger line on good volume with a protective stop at 14.85 and an upside target of 17.80.

Technicals

Turning to the October Sugar chart, we see yesterday's close confirm a double bottom pattern. The close was above the 50-day moving average, adding to the bullish sentiment from the double bottom pattern. The measure of the double bottom suggests that prices could reach the 17.70's and possibly test stout resistance at the 18.00 level. The 18.00 level will likely have a hand in determining the intermediate direction of the Sugar market. A breakout above this level suggests the beginning of a new uptrend that could test contract highs. Failure to cross this level could lead to disappointment among traders.

Robert Kurzatkowski, Trading Specialist