Softs

Short Covering, Fundamental Ideas Turn Sugar Trend Higher

Posted 10/18/2018 7:51AM CTJoe Nikruto

This week’s comment finds sugar continuing to rally in dramatic fashion. From 12.20 on October 4 to today’s move over 13.70, sugar has been on a one-way ride higher. Wire services have been struggling to find fundamentals to fit to the price action. In the last few weeks, we have heard of currency strength in Brazil, demand for ethanol, and even pestilence in today’s Hightower report. Apparently, white grubs may be impacting the available supply of sugar in India calling into question how much they can export in the coming months. 

The last COT report found commodity trading funds still short 30k contracts plus. These funds should have been not only stopped out of short positions, but well on the way to being long. Typical trend-followers will only be able to exit long positions on a move below 12.15 and 11.00, which underscores how fast and how far the market has rallied. In the next week or two the stops will catch up with the market and move to higher levels, but if sugar continues to scream higher, it won’t matter much where the stops are underneath. 

Fundamentally, I can’t wrap my head around this rally, short covering should only be able to take this market so far. Luckily, the chart is telling us what we need to know. The trend is up on all but the longest of scales. Traders who are still short should be laboring to establish levels for risk management. Market participants who traffic in overbought/oversold are likely on the edge of their chair waiting for a technical correction that will bring the indicators off the ceiling. The 18-day moving average comes in at 12.30. I wouldn’t be surprised to see a move back to that level in short order. Ultimately, I would like to have short exposure to what I believe will be yet another year of solid production for sugar. But for now, I do not want to fight the tape.

Sugar Mar ’19 Daily Chart

Sugar Mar '19 Daily Chart

Joe Nikruto

Joe Nikruto attended Indiana State University and DePaul University in Chicago with a major concentration in economics. "It was during college that I got a job as a runner at the Chicago Board of Trade. I was immediately hooked," he says.He adds that he also enjoys futures trading because anyone can do it. "Your success depends on how you handle the risk and how much work you are willing to put in. You don't need a big-time Wall Street connection, or a degree from an Ivy League school to get started. Your success largely depends on you and what you put into it." In 1992, he started as a runner and back office clerk for a very large futures commission merchant (FCM). He moved up to pit clerk, then research associate working on the trading floors directly for a grain and livestock concern based in Memphis. He spent time on various trading desks for a large retail FCM and then became Series 3 registered in 1997. He also helped develop an online trading platform and consulted on development and trading of mechanical trading systems. He has always worked to assist his clients with all types of trading-from option strategies and hedging to complicated mechanical trading systems. His advisory background includes Floyd Upperman, McMaster, Walter Bressert, Ken Roberts, Tech Guru, Hightower, Helms and Barry Rosen. As for his involvement with RJO, Nikruto says, "R.J. O'Brien has been in operation for more than 100 years. That is a century of supporting customers. You have to be doing something right for folks who use futures to choose to do business with you for that long."