Want a White Christmas? Buy Sugar

The recent bull market in sugar reminded me of the equity market’s bull market from 2020-22. An overpowering uptrend that was relentless on bearish traders. But, like all extended moves, it eventually stopped, but not until after trading at all-time highs. Will the bull continue his sugar high after the current 19% price drop from all-time highs?

The recent bull market began in April 2020 at $0.0921 and stopped at $0.2814 in November 2023, based on the continuous near-month contract, an astounding 205% increase. Sugar #11 futures traded on the Intercontinental Exchange (ICE) are priced in cents per pound. 

Source: Barchart.com 

Reuters news reports, “Sugar production in center-south Brazil for the 2024/25 (April-March) season should reach a record 42.6 million metric tons.” Comparing crop years, they reported, “The projected record, which would exceed the 40.3 million tons estimated for the 2023/24 cycle.”

Later in the report, “Despite Brazil’s rising output, the global sugar market will remain in deficit because sugar production in other countries such as India and Thailand is falling.” 

The Legacy Commitment of Traders (COT) Report 

Source: Barchart.com 

The daily sugar chart illustrates the steep sell-off from all-time highs. The bottom of the chart is the Legacy COT report showing the commercial and swap traders’ (red line) net-short position in the sugar market. Currently, they’re net short 188,821 contracts. While this may sound bearish, their current position is the least bearish that the commercial and swap traders have been in 52 weeks, which is bullish. 

Unlike speculators, who typically follow trends, their trading style is dollar cost averaging. Why would traders buy in such a steep price decline? They wouldn’t if they did not think prices may turn around and go higher. End users of sugar who want to buy low to protect their profit margins are now demonstrating concern. 

A similar setup was present in July 2023, when the commercial and swap traders were again at their least bearish position, and a pursuing rally occurred soon after. 

Seasonal Pattern 

Source: Moore Research Center, Inc. (MRCI) 

The daily MRCI sugar chart shows the 15-year (blue line) historical price pattern overlayed on the current price action. The recent 205% rally has caused sugar to have counter-seasonal price moves. As traders, we are better suited not to predict market activity but to follow it. Eventually, price action begins to track patterns again. The upcoming seasonal window (yellow box) may begin that resumption. We never know. 

MRCI has found, through extensive research, that the March sugar contract has closed higher on or about January 15 than on December 12 for 13 of the past 15 years, or an 87% occurrence rate. Two years of the 15 tested did not have a daily closing drawdown. The seasonal window is open for approximately 35 calendar days.   

The relative strength index (RSI) indicates that sugar has entered an over-sold area by closing under 30%. A similar incident occurred in July 2023, resulting in a sizeable rally. 

Seasonal pattern research identifies repetitive patterns from historical data to alert traders to potential opportunities for the pattern to repeat in the future. These patterns can result from consistent fundamental or technical events throughout the researched years. If recent data has an anomaly, such as the current 205% price move in sugar, the historical data tends to be overridden, resulting in counter-seasonal moves of typical seasonal patterns. These are why seasonal patterns should not be used exclusively for trading decisions. 

The daily chart shows that prices are in a free fall from all-time highs. And to buy these as prices continue to fall would not be advised. Enough buyers will eventually enter the market to slow the descent and reverse it. At this point, there may be evidence that the above-mentioned seasonal pattern, the COT report information, and the RSI in an oversold position may work. Following the price trend up is a more conservative approach to risk management. 

In closing 

Traders can participate in the sugar market using a futures contract, SB. Or they may use an exchange-traded fund CANE for their equity trading account. 

This trade has some odds enhancers supporting it, but until the price reverses up, traders may be taking excessive risks to participate. Always manage risk and use your personal trading rules to participate in the markets.  

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On the date of publication, Don Dawson did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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