This week’s comment finds October sugar futures laboring to carve out a bottom. After making new lows on July 16, sugar futures found buying interest and promptly spiked 50 plus points that very same day. Interestingly, what appeared to be short covering at first glance took place in a time frame where the fund short position increased by 30k contracts and open interest was little changed. This speaks to a change in ownership where the commercial participant was happy to buy all the contracts the fund trader wanted to sell. This action could be a signal that the bearish fundamental backdrop for sugar, significant surplus and moderating growth in consumption has, for the time being, been priced in.
A quick look at the charts show what could be a bullish set up or at least a moment of truth for the October sugar futures contract. After the outside day up on the 16th the market drifted lower but was unable to make new lows. In fact, the October contract now finds itself, having moved higher, just below the 18 -day moving average, 11.29. Failure to make new lows, knocking on the door of the 18-day moving average and increasing volume are all signs of a market that could be working to put in a bottom. The commodity trading managed fund category has also increased its short position to 100k contracts. This 100k is well off the 175k short we saw in 2017 but still large enough to place the fund trader in precarious technical territory. 12.00 and 12.25 are levels that will force the fund trader to cover short positions and I consider those very reachable. I am not sure that this, in and of itself, is a fundamental factor that can override the overwhelming bearish theme of large, continuing surplus of actual sugar.
The Hightower group continues to highlight sugar to ethanol in Brazil and we have spoke to this more than a few times due to their coverage. It is a supportive factor. But likely not one that can rescue sugar from the kind of production we have seen from countries that are good at making sugar. But, as I have often mentioned, fundamental traders have the clearest picture of the fundamentals near market bottoms and market tops. To avoid this, we use charts to help us trade what we see and not so much what we “know”. To that end, what we see on the chart could be a market that is turning up. Call options for September in the 1150 and above range are affordable and gives a trader 20 days of exposure to a move higher in the October sugar futures contract. With sugar dancing right on the line, the previously mentioned 18-day moving average, 11.29 and with the fuel in place for a rally fire I don’t expect it will take more than 20 days for this set up to resolve one way or the other.
Sugar Oct ’18 Daily Chart