Long-Term Stocks Keep Sugar Traders Busy
Today's Idea
The Sugar market has seen a bullish bias of late, largely due to many traders not trusting the most recent crop projections. This is not because they do not trust that the numbers are accurate if weather projections hold true, but rather, that the weather may not cooperate. Short-term supply concerns have been alleviated, but the world is still in the process of rebuilding its stockpiles. Technically, the market has crossed a hurdle at 22.50, but there is significant risk that this rally could stall quickly. Some traders may wish to take a more conservative approach and enter into a bull put spread instead of a more target-oriented approach. For example, some traders may wish to sell the July Sugar 21.50 puts and buy the July 21.00 puts for a credit of 0.15, or $168. The maximum profit would be the initial credit and the trade risks $392.
Fundamentals
Sugar futures have rebounded over the past several weeks, largely due to rain interfering with the Brazilian harvest. Prices are still well off of this year's highs, after supply tightness eased because of the larger Brazilian and Indian crops. Supplies for this crop year appear to be more than ample, which can be seen as a bearish force. The bullish undercurrent comes from the fact that the world is coming off several disappointing harvests. In the near-term, we are well supplied, but it may take several good harvests to restore stocks to comfortable levels. There is also bullish support coming from the EU, which is expected to allow imports of duty-free cane Sugar to make up for the shortfall in beet Sugar produced by EU nations. While the aforementioned factors all seem to point to higher Sugar prices, the upside of the market may be seen as limited. While Brazil's large harvest was plagued with weather-related issues, Thailand is expected to produce a record Sugar crop. Also, China could put further pressure on the bull camp by selling some of its Sugar reserves. Weather, of course, is the wild card, where poor weather in Thailand and India could quickly tighten the Sugar supply once again.
Technical Notes
Turning to the chart, we see the July Sugar contract comfortably trading above resistance at 22.50 over the past several sessions. This can now be seen as support for the July contract. Ideally, many traders would like to see prices come down and test this support area to confirm support. If prices are unable to hold 22.50, the market may come back to test the 20.50 area. Minor resistance comes in near the 23.80 market, while the next significant area of resistance now comes in at the 25.00 level. This area has a significant amount of congestion and the market will likely have to have significant momentum to cross through this barrier. What may be concerning for some traders is the shape of the recent move. While prices have moved higher very nicely, the shape of the rally that began in early may does look like it could be conducive to forming a bearish wedge on the chart. Normally, traders do not like parabolic moves, but the slow, grinding pace of the rally is not what traders like to see after a reversal. In short, there is a real possibility that the chart may be showing the makings of a "dead cat bounce." Prices are now approaching the 50-day moving average. Closes above the average could be seen as a bullish signal over the intermediate-term. The oscillators are neutral at this time, signaling a continuation of the recent trend.
Rob Kurzatkowski, Senior Commodity Analyst
