Bull Market in Sugar Starting to Sour?
Monday September 19, 2011
With chart patterns seeming to suggest the recent highs for March Sugar may be in place, some traders may wish to consider exploring bearish trading strategies using Sugar futures options. An example of one such strategy would be to sell bear call spreads. For instance, with March Sugar trading at 26.73 as of this writing, the November 28.50 call could be sold and the November 30.50 call bought for a credit of 0.30, or $336.00, not including commissions. The premium received would be the maximum potential gain on the trade, which would be realized at option expiration in mid-October should the March Sugar futures be trading below 28.50.
Fundamentals
Sugar bears certainly had a long wait, but it appears that there may finally be cracks in the Sugar bull market, as prices have fallen to one-month lows. Sugar prices have been elevated on concerns of lower than expected production out of Brazil, who is the words largest Sugar producer. However, a report from Unica, the country's largest Sugar industry organization, announced that production levels have started to increase in August. Though it appears that Brazil's production will still be about 10% lower than last year, it is unlikely that we will see any further reductions in the crop estimate. In addition, many traders are still predicting larger production totals in the Northern Hemisphere that may more than offset the lower Brazilian harvest. Indian Sugar mills are expected to export an additional 213,250 metric tons of Sugar, having already exported 2.6 million tons this marketing year. Also weighing on prices was the announcement that 110,000 tons of Brazilian origin Sugar was delivered against the expired October Liffe White Sugar futures contract. This is leading some traders to believe that the current tight cash market supply situation might be coming to an end. Going into the last quarter of 2011, many traders will turn their focus to the demand side of the equation and what effects the European debt situation will have on demand for commodities in general, especially if we return to a global recessionary environment.
Technical Notes
Looking at the daily chart for March Sugar, we notice that a bearish descending triangle formation was confirmed as prices broke below the support line. There also appears to be a double-top formation on the daily chart, adding to the potential that the near-term highs are in. The 14-day RSI has turned weak, with a current reading of 38.23. Though prices are now well below the 20-day moving average, longer-term traders may not turn bearish until we see a move below the 200-day moving average, currently residing just below the 25.00 level. The next support area for March Sugar is seen at the August 8th low of 25.38, with resistance found at the 20-day moving average currently near the 28.50 level.
Mike Zarembski, Senior Commodity Analyst
