ICE sugar set for a massive bounce
Published: 03/18/2010, 3:05:52 PM
World sugar futures prices have dropped 35% over the past six weeks as market participants' focus shifted abruptly away from supply concerns, but technical chart signals now suggest prices could bounce, according to Dow Jones.
May sugar on ICE Futures U.S. touched 29 cents a pound the same day the March contract set a 29-year high of 30.40 cents on Feb. 1, due to concerns about production shortfalls in Brazil and India, the world's top two sugar producers.
But futures began to fall because the high prices drove away demand and output in Brazil and India turned out better than expected.
On Wednesday, May sugar touched 17.66 cents -- its lowest price since July 7 -- but recovered to settle 9 points higher at 18.33 cents a pound Wednesday.
The positive settlement after a new low is one indication the volatile market will stabilize. That recovery has continued into Thursday, where in recent trading, May sugar was up 0.1% to 18.43 cents.
Sugar futures are extremely oversold according to technical chart indicators and long overdue for a sizeable short-covering bounce. Traders could cover shorts -- or buy back previously sold positions -- on ideas that the market has fallen to its lowest levels for the near term. Short covering closes exposure to bets that the market will fall.
However, analysts caution that any bounce may be short-lived.
"Right now there's a distrust of fundamental trading -- there's still a lot of people that are hoping for a bounce," said James Cassidy, director of Newedge USA's sugar group in New York.
After fundamental news ran prices to such high levels and then incited a free-fall, technical patterns are seen as more reliable, Cassidy said.
Sugar will likely start to consolidate and reduce volume and volatility as traders step aside and wait for prices to stabilize, he said, adding that the market can ignore fundamental news for weeks and key in on technicals in such situations.
May sugar futures will bounce back toward the 21.50-cent level after completing a "head-and-shoulders" pattern, said Spencer Patton, chief investment officer at Steel Vine Investments in Chicago. The chart pattern indicates a reversal from the recent trend is likely.
"A move below 18 [cents basis May] would be really stunning without bouncing," Patton said.
Sterling Smith, market analyst at Country Hedging in St. Paul, Minn., said May could bounce if the price falls to 17 cents. But the bounce could be short-lived, Smith said, because more selling would likely follow any gains at that point.
May sugar could tread as low as 17.50 cents by the end of the week, said Smith.
"If it can finish the week in a stable manner, we have the potential for more short covering," Smith said.
A normal bounce would lift May sugar back near 21 cents; a sizeable bounce would vault the prices toward 23-23.50, Smith said.
Once the technically inspired short covering has been exhausted, sugar fundamentals will again be in the driver's seat for prices.