"Gravity effect" pummels Sugar futures
Today's Idea
"Never buy a liquidating market" is an old trading adage that warned novice traders not to try to pick a bottom when a market is in the midst of a major long liquidation sell-off. That being said did the Sugar fundamentals change sufficiently enough to justify an over 20% decline in just less than two trading sessions? Traders who believe that Sugar prices have now become oversold, may wish to explore long option strategies to help limit potential risk versus an outright long position in the futures. One such example is buying a call option in Sugar. For example with March Sugar trading at 26.21 as of this writing, One could buy the January Sugar 27 calls for about 1.64 points or $1,836.80 per contract not including commissions. The premium paid is the maximum potential risk on the trade with the trade profitable at option expiration in mid-December should March Sugar be trading above 28.64.
Fundamentals
"Ouch!" That was the reaction of most Sugar bulls on Friday, as lead month March Sugar fell a whopping 3.45 cents per pound, the largest one day loss in 30 years, as reports of a large sugar surplus in India hit the market, as well as a general sell-off in the commodity sector to end the week. In was only this past Thursday when Sugar futures soared to 33.39, a 30-year high, as traders feared that poor growing conditions in Brazil, the world's largest Sugar producer, would curtail world supplies enough that the market could face a third consecutive year of deficits. However, on Thursday, The Farm Minister of India, announced that the country would produce a surplus of 3.5million tons on Sugar this year, much of which could be exported this year. Though the exact amount India may export has not yet been released, this news of a bumper Indian Sugar crop sparked a torrent of selling on Thursday with few buyers willing to step in front of this long liquidation. Then on Friday, concerns that Interest rates in China could be raised sparked a move out of "risk" trades and triggered a commodity wide sell-off that sent Sugar prices down over 11% on the sessions. The Commitment of Traders report showed both large and small speculators added over 8,000 contracts to their net-long positions to total a combined 204,443 contracts as of November 2nd. This was before the over 3 cents per pound rally took place and as much as an additional 10,000 contract may have been added to the net-long position before "the Gravity Effect" wiped out over one month's gains in just two trading sessions. The move demonstrates how volatile trading activity can be when prices are at or near historic highs.
Technicals
Looking at the daily chart for March Sugar, all one can say is "wow". The over 20 % correction from 30-year highs demonstrates what can occur when a long standing bull market finally runs out of steam. These moves can be even more extreme in the age of electronic trading when there is little depth of liquidity without a floor trading population to absorb the selling. Electronic market making makes it too easy to pull bids in the midst of liquidation selling as a rash of sell-stops are triggered. Even with 20% percent decline, the market is still trading above the 200-day moving average, which many technical trades look to determine is a market is in a bull or bear market phase. The next major chart support point is not seen until the 22.50 area, with resistance now found at the October 27th lows of 27.41.
Mike Zarembski, Senior Commodity Analyst
