Commodities

Do the Bulls Have a Sweet Tooth?

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Don Dawson
Instructor

One of my favorite markets to trade is the Sugar market. There is sufficient volume for Spread and Outright Futures trading, creating good liquidity. Due to the relatively small average daily range (as of this writing 25 ticks or $280 per day) this is not a good day trade market.

Disclaimer: The following information about the Sugar market is not intended for a trade recommendation.  It is up to the individual trader to make their own analysis about whether to buy or sell the Sugar contract. This information is for educational purposes ONLY.

Another reason for liking this market is that it is like a little known gem that few traders pay attention to.  So let’s keep this article between you and I, ok?  Think about this for a moment, when was the last time you saw news of the Sugar market on the front page of the Wall Street Journal?  Exactly, hardly ever and that is how we would like to keep it.  When markets are making headlines their price is driven by emotions of fear and greed.  The technical and fundamental information gets lost in all of the emotional noise.  Since you rarely read about Sugar in the media then you can expect true fundamental supply/demand to drive the prices.  If there is too much Sugar, prices will fall – if there is too little Sugar prices will rally.

Sugar has been in a long term downtrend since about February 2011.  Prices topped out around 36 cents per pound in the front month contract.  Since that time Sugar has traded down to about 16 cents per pound.  All rallies in the Sugar market have been met with aggressive selling pressure causing prices to drop.

Commercial traders have been buying on this price drop and are now positioned at their largest net long position in 5 years while both large and small speculators are the most short they have been in 5 years.  Usually this is a bullish pattern for a Commodity.

Another event is the Sugar market according to Moore Research Company (MRCI) (www.mrci.com)  has a Seasonal low that has occurred for the last 15 years around June and then rallies very strongly into the middle of August.  Figure 1 illustrates this pattern.  I would like to thank MRCI for allowing us to use this Seasonal chart for illustration.  If you would like to have a free two week free trial to MRCI Seasonal Research you can contact Melissa Moore at melissa@mrci.com and let her know you are a student with Online Trading Academy.

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Recently a student from Canada brought in the Wall Street Journal that actually had an article about the Sugar market.  Have you ever noticed that when the media talks about a usually slow market after a prolonged move that it reverses direction? Like this article was saying how many tons of Sugar are in the world currently the largest in many years.  The article addressed how many of the Sugar producers in the United States have millions of dollars of cheap government loans that are due very soon.  To help with this issue the United States Department of Agriculture (USDA) is going to begin buying physical Sugar ( approximately $38 million worth) and storing it to take a lot of Sugar off the market.   This in turn usually causes a Commodity price to rally since the Sugar is being stored and not available to be processed.  Once demand returns and price begins to rally the stored Commodity is then released and sold back at higher prices.

Figure 2 is a chart of an un-adjusted continuous Sugar Futures contract.

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Notice how the price is in a solid downtrend.  This downtrend has also carried the Sugar market to all new October contract low prices.  Contract highs and lows have been known to create extremes in a market as well. Looking at the rallies in this market there appears to be plenty of overhead supply to keep prices moving lower.  But eventually prices move low enough where there are fewer sellers (supply) and more buyers (demand) looking to purchase undervalued products. Could we be approaching that time in the Sugar market?  Are the Bulls getting a sweet tooth for being long Sugar?

Another way to watching markets and seeing how the insiders are trading is to watch Commodity Spreads.  Figure 3 will show us a Spread between the current October 2013 Sugar contract and the further out October 2014 Sugar contract.

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Figure 3 is a line chart of the Spread.  If the Spread trend is down this would normally tell you that the front month is underperforming the back month.  In this environment you would find that Commercial entities have plenty of supply of the Commodity.  There is incentive to buy and store Sugar and sell it at a later time when prices are higher.  Buy cheap now, sell more expensive later.

But notice how in June the Spread trend turned up and has had a steady uptrend since.  This illustrates the front month of Sugar is now being accumulated by Commercial interest because of the demand they are seeing in the nearby future.  The front month of Sugar (Oct 2013) is now outperforming the back month (Oct 2014).  If you look back at Figure 2 you see the October 2013 Sugar contract made a new low while the Spread in Figure 3 kept going higher.  This is usually a very positive bullish divergence setup for a Commodity market.

When traders can use different ways of enhancing their technical analysis such as using Seasonal Patterns, Spread Charts, making trades counter to what the media is saying and the Commitment of Traders report to analyze market participants they can gain a significant edge in their trading.

“Nobody ever wrote down a plan to be broke, fat, lazy or stupid.  Those things are what happen when you don’t have a plan.”  Larry Winget

Always have a written trading plan before risking your hard earned capital.

- Don Dawson

Disclaimer
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.