This week’s comment finds the October sugar futures carving out a 5-day retracement of the recent two week down draft. That move lower took the price of the October sugar from a swing high of 15.16 all the way down to 12.92, 18 points from the recent low, 12.74. Technical measures are bouncing from oversold levels giving some room for the market to head lower again should the 50-day moving average, 13.78, prove to be too stiff of resistance for the October sugar contract to surmount. Next few day’s price action should be at least instructive even with the dog days of summer upon us. Volume has been sufficient and traders seem to be active in the soft commodities even though prices are, according to many commentators, depressed. The commercial trader is less short (actually slightly long) than she has been in the last 5 years, maybe more. Like we had guessed in our last comment the funds have increased their short exposure, to about 109,000 contracts as of the last report. This recent move could show, again, the funds being forced to cover short positions. Normally in low volume environments fund short covering can be responsible for moving markets well away from areas of value. But volume has been decent and it won’t surprise me to see that the funds have decreased their short position by about 20-30k contracts. This move puts the funds back in a position to press the short side should the October contract be unable to move convincingly above the 50-day. If the 50 day gives way and we find October sugar trading above 13.78, the short covering fire that could result may signal an impending change in trend. It is important to note that while the technical action can lead the awareness of changing fundamentals by days and weeks the technical action itself cannot change the fundamentals. An important distinction for those of us who would use the COT as a set up for potential trades. The large participants can have an extreme position for longer than we can maintain enough risk capital to stay in the game. With the fundamentals being well known and well-worn I am looking toward call options to position for a possible continuation of the short covering rally we have seen the last 5 days. With the possibility that there could be significant acceleration to the upside it might be wise to look for long exposure via October calls. They don’t expire until September 15. The move that position anticipates will have resolved itself one way or another by then.
Oct ’17 Sugar Daily Chart