Will Bulls' Sugar Rush Last?
Fundamentals
Sugar futures are once again a sweet treat for bulls, as the nearly 5-month long bear market appears to have ended. Since recent lows were made back in early May, lead month October Sugar has rallied over 4 cents per pound, mainly due to increased buying out of Asia to help replenish Sugar inventories. In addition, heavy rainfall in Brazil, who is the world's largest Sugar exporter, has hampered the loading of Sugar to waiting vessels in Brazilian ports, with reports of a large backlog of ships waiting to dock. While current fundamentals are favoring higher Sugar prices in the near-term, the longer-term outlook appears less positive. Once the weather begins to improve and ships can get into port, Brazil should be able to supply an ample amount of Sugar to the market, helping to elevate current tight supplies. India, who is the world's largest Sugar buyer, is expected to see its Sugar production rise to nearly 25 million tons, which is up over 6 million tons from last year's disappointing harvest, as weather conditions have been improving for this season's production. Speculators have maintained their overall net-long position in Sugar futures, even through the down swing, and the recent breakout should help attract fresh momentum buying. However, the rally could also attract hedge selling pressure, especially now that prices have moved above 18 cents per pound. It will be interesting to see if speculators can successfully move prices even higher, especially once the Brazilian shipping gridlock gets resolved and fresh supplies hit the world market.
Trading Ideas
October Sugar has broken through strong resistance at 18 cents; however, many analysts expect to see significant hedge selling materialize if prices move close to 20 cents per pound. Traders taking a contrarian view who believe that the fundamentals do not justify Sugar prices above 20 cents may wish to explore the sale of out-of-the-money calls in Sugar futures options. An example of such a trade would be selling the October Sugar 22 cent calls. With October Sugar trading at 18.37 as of this writing, the October 22 calls could be sold for about 0.30, or $336.00, not including commissions. The premium received is the maximum potential gain on the trade and would be realized if October Sugar is trading below 22.00 at option expiration in September. Given the risk involved in selling naked options, traders should have an exit strategy in place should the market go against them. One such exit strategy would be buying back the option sold before expiration should October Sugar close above 20.00.
Technicals
Looking at the daily chart for October Sugar, we notice prices broke-out above resistance at the April 15th highs of 18.10. This is a positive sign for bulls, especially now that prices are approaching the 200-day moving average, currently near the 18.70 area. Should prices continue to move higher, there is significant upside resistance between 19.00 and 21.50. The 14-day RSI is strong, with a current reading of 67.83. Near-term resistance is found at 18.10, with support found at the 20-day moving average, currently near the 16.85 area.
Mike Zarembski, Senior Commodity Analyst
