Last Gasp for Sugar Bull Market?
Wednesday, August 17, 2011
Some traders who believe the highs in Sugar have already been made may wish to take advantage of the recent price recovery to explore bearish positions in October Sugar. An example of such a trade would be to sell calls in Sugar futures options with strike prices above the contract high of 31.68. With October Sugar trading at 28.25 as of this writing, the October Sugar 33 cent calls could be sold for about 0.22, or $246.40 per option, not including commissions. The premium received would be the maximum potential gain on the trade which would be realized at option expiration in mid-September should the October Sugar contract be trading below 33.00.
Fundamentals
Bulls seem willing to try to stage another rally in the Sugar futures market, despite growing signs of a global Sugar surplus next year. Lower than expected Sugar production out of Brazil sparked the price rise in July, as slow shipments from the world's largest Sugar producer forced end-users to bid-up prices to obtain supplies. However, production totals by northern hemisphere producers appear ample, with Thailand expecting a record crop and India expected to increase exports, as its production levels have improved markedly after several years of below average output. Current analysts' estimates range from between a 4 and 6 million ton Sugar surplus in 2012, which should keep price rallies in check. There is talk that China may be looking to buy Sugar to help replenish its reserves, which were drawn down the past couple of years, but it appears that country is waiting for a price break before entering the market. Commodity funds which were holding a near-record long position in Sugar this summer have been rather aggressively lightening-up their long position, with the most recent Commitment of Traders report showing non-commercial traders shedding just over 27,000 contracts for the week ending August 9th. Though prices are currently trading nearly 2 cents off the recent lows, volume on the current price recovery has been well below the recent average, which may be signaling a bout of short-covering is behind recent gains and not fresh buying. This could be ominous for bulls if the recent highs are not taken out soon.
Technical Notes
Looking at the daily chart for October Sugar, we notice what may be a 'bear flag" forming. This chart pattern is normally formed after a sharp price decline, where the market then moves sideways to higher on lower than average volume. To validate the pattern, we would need to see prices falling below the "bottom" of the flag on heavier than average volume. Prices remain below the 20-day moving average, but are above the 200-day average giving a conflicting directional bias to short and long-term traders. The 14-day RSI has turned up, but remains in neutral territory, with a current reading of 50.97. The August 8th low of 26.38 looks to be near-term support for October Sugar, with resistance seen at the August 11th high of 28.69.
Mike Zarembski, Senior Commodity Analyst
