Sugar Volatility Event on the Horizon?

December 13, 2018 8:10AM CST

This week’s comment finds March sugar futures moving aggressively sideways.  After a spike higher at the end of last month it appeared that March sugar was ready to break out to the upside. Wire services have been replete with bullish supply guesstimates from every bank, industry association and farmers co-op even remotely involved with sugar. Outside markets have stabilized somewhat. March sugar, resting just below the 50-day moving average and laying on the shorter term 10 and 18-day averages, could be rolling over. In a market moving sideways, like sugar has been, it only takes a day or two worth of price action to change the technical picture.

If you subscribe to the fundamental narrative, sugar is just marking time until it’s off to the races with an upside breakout but, every day that sugar doesn’t break out, and the technical price action does not support the fundamental view, the March sugar futures contract gets heavier. Funds are mildly short, a little more than 50k contracts.  The market is not technically positioned for funds to be short. In effect they appear to be early to the short side. Price action below 12.16 would warrant entry on the short side but the market has yet to trade below that level in November and December.  It could well be that the managed money community is making bets on sugar basis the weakness in Crude and RBOB. This puts sugar in an interesting position as we work through the Holiday Season.

 If March sugar trades over 13.20 it could be that these recent short bets are underwater and may be forced to capitulate. This buying back of short trades could help fuel a move to the upside, exacerbated by Holiday trading conditions. Same goes for a move below 12.10. Commodity trading funds currently on the sidelines will be entering new short positions and funds already short will add to positions. In what most would consider, at least for now, a sleepy market, options traders not in a cookie induced coma may be able to find opportunity with a rather reasonable amount of risk.

Sugar Mar '19 Daily Chart

Sugar Mar '19 Daily Chart

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