Open Interest in Sugar Declines, More Strength Required to Extend Rally

November 1, 2017 12:53PM CDT

This week’s comment finds the March sugar futures contract having rallied almost a full point since October 24. A healthy move by sugar standards. The bulk of that move took place on Friday October 27 with the March contract closing up 50 points. In the three trading sessions since then, open interest has dropped about 30k contracts as the risk managers caught up with short traders. After having bounced along between 14.00 and 15.00 for so long, any move toward that upper or lower boundary looks like a potential breakout. This move is no different. Trend followers have been stopped out of recent shorts entered in late September on the break below 14. In the last few trading sessions, this short position was covered on the close above 14.50. With the 30k reduction in open interest, declining volume on the consolidation of the break out, and Wednesday's late day sell off, this recent rally may have run its course. Again, the 50-day moving average will help us sort out the tea leaves. If sugar is able to hold above 14.40, in my opinion, this market could continue to test upside levels such as the 23.6% retracement level, 15.11 and recent high from September, 15.20. Failure to hold 14.40 could set the stage for yet another run at the lows. The fundamental situation, well known and well trafficked, still looms. Wednesday morning’s Hightower comment brought up a recent report from analytics firm Green Pool. They are calling for the largest surplus in sugar in more than a decade. Green Pool attributes this surplus to increased supply and declining consumption. This report and others like it just keep coming, all speaking of rising odds of increasing surplus. I am always suspicious of “feelings” around fundamentals, but this increasing surplus situation “feels” like it could continue to pressure sugar for some time. I don’t want to stand in the way of technical strength should it be demonstrated in the coming days, but if the March sugar contract should falter near the 50-day moving average traders will want to be positioned for the potential for new lows. 

 

Mar '18 Sugar Daily Chart

Mar '18 Sugar Daily Chart

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