Bulls in Sugar Look for Hope of a BottomPosted 08/24/2018 7:18AM CT |
This week’s comment finds the October sugar futures contract, again, trying to carve out a bottom. Price action from the previous two sessions has given bulls hope that sugar could be at the beginning of a bottoming process. With support from energy markets and the thought we could see less surplus in the next year there are ideas the burdensome supply may be priced in. That was actually the headline from the Hightower group comment Thursday morning – “Already Priced Big Surplus”. And, it wouldn’t be the first time we have seen the press call for this relentless production to be considered priced in. It would be easier to get my mind around the idea of a value area for sugar if there wasn’t more surplus sugar on the way. What we do know is that sugar producers globally have shown very little indication of slowing down.
Fundamentally, there are reasons for a bounce in sugar. Wire services and commentators have been mentioning them for months. Calls for Brazilian currency strength, continued increased use of sugar for ethanol in Brazil and higher energy prices are all fuel for a move higher. Technically, the size of the managed short fund position is almost as big, at 154k, as it has been all year. There is still room to run, meaning funds can still be sellers, helping to drive the market lower. But with the size of the position as big as it is, there is possibility of short covering rallies. We attempted to position for a bounce such as this a few weeks ago with inexpensive options but the market did not cooperate instead rolling over and diving to new lows. This recent two days of positive price action will have bulls and bottom pickers emboldened and pricing out call options. While the trend is down, really down, one can easily see the lure of using inexpensive options to position for a bounce. It could be especially wise to use options both for scale and sound risk management. The last thing you want to do is try and catch the falling knife with futures and not have stops in place to protect your trading account.
Sugar Oct ’18 Daily Chart