Short Covering Takes Sugar Market Higher; How Much Longer?

September 6, 2018 12:40PM CDT

This week’s comment finds the October sugar futures contract working on an eight-day rally. Multi-day rallies in sugar have been hard to come by. Wire services are having trouble finding a fundamental factor to fit to this short-covering rally.  A relatively large decrease in open interest has taken place on this rally. What has traders covering short positions so aggressively? Difficult to say for sure. The fund short position had become rather large at upwards of 190k contracts.  When the positioning of the fund and commercial participants becomes “extreme” there can be violent moves in the opposite direction of the prevailing trend. These short covering rallies in downtrends and often-times dramatic meltdowns in uptrends occur with very little fundamental information to be had. Is there less sugar today than there was two weeks ago? Have large and well-read forecasters changed their outlook on the amount of surplus going forward? Likely not. Still, short covering can feed on itself as traders take profits on profitable positions and can even be forced into new long positions as price action takes the market over technical lines drawn in the market sand.

For our purposes, October sugar is now bumping into one of those lines, the 50-day moving average, 10.87. Having jumped over the 10 and 18-day moving averages with no difficulty whatsoever it feels like the trade is watching anxiously to see if funds will continue to aggressively cover short positions.

In their daily commentary, The Hightower Group, is looking for currency stability in Brazil and India, two of the largest sugar producers, to strengthen the sugar futures market. I am not convinced that it will take anything more than the desire of the fund trader to trim short positions to keep this sugar market on the upswing. Should October sugar be able to get out above the 50-day, 11.15 and 11.60 loom as large targets. Don’t stand in the way of this rally yet, sugar has room to move to the upside and if one is trading aggressively, there could be a trade to be had. Ultimately, supply and demand should reassert itself. An extended rally will provide us a place to take a shot at the short side again.

Sugar Oct ‘18 Daily Chart

Sugar Oct '18 Daily Chart

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