Technical fist fight around new lows – early signal of possible move higher?

March 22, 2018 7:25AM CDT

This week’s comment finds sugar futures attempting to stabilize and work off an oversold technical condition. After the break to new lows earlier this month in the May contract, sugar saw even more downside price pressure. Until Monday.  Monday’s move in sugar, a break to a new low of 12.30 and then a rally back up to 12.90 was nothing if not dramatic. This reversal took place on good volume and caught the attention of bulls and bears alike. Alas, back to the downside we went. Sugar was unable to hold onto any gains in the upper range. What looked on Monday to be a technical ray of light was muted as sugar closed back in the 12.50’s.  The fundamental situation, though widely known and trafficked, remains.  Lots of sugar. The commodity trading funds are very short. 160k contracts or more.

Technically, the market is oversold.  The May sugar contract is squarely below all the moving averages.  The 10-day moving average comes in at 12.76, the 18-day at 13.01.  While merely derived, the moving averages are a fine line (no pun intended) in the sand we can use to gauge the strength of a market trend.  An inability to spend time over the 18-day is a hallmark of a strongly down-trending market. In previous comments I have struggled to find a way to elaborate the fact that sugar producers do not seem to be reducing production at these price levels.  Much like cattle feeding, which I have heard described as an addiction rather than a business, it could be that sugar producers would rather make a small profit or breakeven rather that shut production.  What price will inspire sugar producers to step aside? That is the wild card. 

Back to the commodity trading funds. They are very short and have more room to add to their position which adds to the potential for more downside pressure.  They won’t begin to cover short positions unless the market finds a way to work up to 13.58 and 13.94.  Even then, we have seen recent bouts of short covering lead to rallies, but they have been short lived.  The reversal on Monday could have been a signal that we have reached an area that end users view as attractive in terms of sourcing supplies. I want to look at this market from the long side, fully aware that trading against the trend is not often the path to profits.  If we can see more constructive price action, calls for May, which do not expire until 4/16, could provide aggressive traders a way to get long exposure for the next three weeks at reasonable cost.

Sugar May '18 Daily Chart

sugar_may18_daily_chart

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