This week’s comment on October sugar futures finds our market rolling over. Tuesday’s move that took the October contract over 12.60 only to see a close of 12.45 now looks like a technical failure. Wire services are playing up Brazilian use of sugar cane to ethanol, which has been significant. Wednesday’s Hightower comment talked of Brazilian monthly production for June down 17%. Still, October sugar futures closed down yesterday, 40 on the day at 12.05 just 3 ticks off the low. Hightower also suggests this weakness could be courtesy of month end positions squaring. Whatever fundamental we fit to the chart the painting is looking more than a little bearish. Sugar has been consolidating/coiling since the October contract failed to hold 13.00 at the beginning of June.
Oftentimes a period of consolidation will be followed by a move in the direction the market was going before the consolidation, in this case up. But sugar is burdened by heavy supply. I don’t think anyone is worried that the sugar will be piling up on warehouse floors. However, the size and duration of this continuing surplus may mean sugar will be working to find a lower trading level. The drop below the 50-day moving average, 12.19, along with the proximity of trend-following short entry stops below 12.00 make this chart look heavy. Futures traders could wait for a test of the 18-day moving average, 12.36, and should it hold, enter on the short side. Risk could be managed with stops above 12.65 or 12.85 depending on risk tolerance and available risk capital. Speaking of risk, trend-followers will be herded into short positions should the market trade below 12.00 and 11.90. I view these levels as the line in the sand. Should October sugar futures begin to trade below these levels we could see the market accelerate and begin to work in earnest toward 11.00 and likely lower.
Sugar Oct ’18 Daily Chart