Wednesday, November 21, 2012
Sugar's fundamentals and technicals are now in disagreement, as an improving technical outlook, including an upside chart "gap", is at least temporally overshadowing bearish fundamentals, including a large surplus this coming season.
Sugar futures have traded at their highest levels in nearly a month, as many bearish speculative accounts rush to the exits. Commodity funds have been aggressively adding to their net-short positions this past week and are now controlling the largest net-short position in 5 years. However, market sentiment seems to have changed over the weekend, with a significant rally in equities spilling over to the commodity sector, as many traders seem to be embracing "risk" assets once again. Fundamentally, there is little bullish news in the market to support higher prices, especially with the International Sugar Organization ("ISO") expecting the 2012-13 global Sugar surplus to increase to 6.2 million tons. Though any significant rally in prices is expected to meet some strong hedge selling, commercial traders may wait to see how far short-covering buying may move prices before selling, especially given the size of the speculative short position. Though there is some resistance seen at the 20 cent level basis the March future, prices have the potential to move even higher before some short-hedgers begin any significant selling.
Technical Notes
Looking at the daily chart for March Sugar, we notice prices posting a chart "gap" between 19.20 and 19.25. In addition, the rally above the 20-day moving average seems to have triggered some buying from short-term momentum traders, in addition to triggering buy stops above 19.75. Volume was very heavy on Monday, which added to the validity of the sharp up-move. The 14-day RSI has turned up, with a current reading of 55.20. The high made on October 22nd of 20.50 looks to be the next resistance level for March Sugar, with support seen at the start of the chart "gap" at 19.20.
Mike Zarembski, Senior Commodity Analyst