Rally or Epic Rollover on the Way to New Lows in Sugar?

July 26, 2017 3:32PM CDT

This week’s comment on the October sugar futures contract finds dueling fundamentals and a technical jury that is still out.  You would have been excused for thinking that three sessions of dancing on the 50-day moving average followed by Tuesday's over 50 point drop left the question asked and answered. The question at hand: Is the trend in sugar turning up?  The October contract has been steadily carving out a bottom on the chart since late June. The inability of the October sugar futures contract to convincingly surmount and close above the 50-day moving average combined with the 50 point drop seemingly answered the question. Look out below. But today’s move back to the 50-day moving average, 14.34, opened the door to further upside. Fundamentally, the Hightower group highlighted what is essentially a tax on blended gasoline in Brazil that will increase the demand for sugar based ethanol reducing the supply of sugar.  Large banks came out with revisions higher for sugar prices for the rest of the year. Supply from Brazil continues to increase and the Chinese are adding tariffs on sugar imports.  I continue to believe they are doing this to increase usage of stockpiled corn for sweetener. The COT shows slight adjustments to the positions of the large spec and the commercial trader. These positions are about as  large as they have been for some time on both sides of the coin. A quick look at the recent history shows these two can churn for months in and out of positions while prices continue to rally or in this case erode. Fund short covering won’t be the only fuel this new uptrend fire would require, but it is a solid piece of the puzzle. Don’t be afraid to move ahead of the fundamentals using call spreads.  A solid close above the 50 day moving average could be viewed as a trigger to begin to build this position. Failure to hold above the 18 day, 14.03, and a turn down in the shorter turn moving averages would provide good risk management for exiting any calls.  A hallmark of a bear market is an inability to hold above the 50-day moving average. Stay nimble and don’t try to fight the tide if it is against you.

 

Oct '17 Sugar Daily Chart

Oct '17 Sugar Daily Chart

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