Warning flags emerge for bulls on ICE sugar
Published: 08/31/2010, 6:52:47 AM
ICE October sugar futures were modestly weaker Monday, posting a consolidative "inside day" session, in which the high and low remain within Friday's price range. While the technical trend off the May low has been bullish, upside progress has been muted in recent weeks, according to Dow Jones.
Also, several "red flag" type of technical warning signals have emerged for the bull trend and traders should monitor key chart support levels closely near term.
Since May 7, ICE sugar bulls have controlled market action, driving the October contract from a low at 13.67 cents to the Aug. 25 high at 20.37 cents. However, that bullish trend appears to be losing momentum.
Looking at the daily relative strength index, a "bearish divergence" has emerged on that indicator. While ICE Oct sugar rallied to a new high on Aug. 25, that momentum tool actually turned lower. The "divergence" occurs as the momentum reading did not "confirm" the new price high. That is seen as a technical warning signal that price could be vulnerable to turning lower.
Dave Toth, director of technical research at R.J. O'Brien and rjomrt.com said while for now the four-month uptrend remains "intact and must be respected, a couple of red flags pose threats" to the sugar bull trend.
He highlighted key short term "risk parameters" and key chart support levels for traders to watch. The first level lies at the Aug. 24 low at 19.09 cents and the second level comes in at the Aug. 10 low at 17.51 cents.
Taking a look at the overall technical concerns evident on the ICE sugar chart, Toth pointed to "waning upside momentum" for the market.
Additionally, he calculated a 50% Fibonacci retracement resistance zone at 19.90 off of a weekly active continuation logarithmic scale chart.
"The market is petering out around the 50% retrace at 19.90," Toth said.
Another warning flag that Toth identified on the daily chart for ICE October sugar is the possible completion of a five-wave Elliott wave count. "We've got a nice five-wave rally off the early May low to the recent high at 20.37," Toth said.
In Elliott wave terms, markets move up or down within five wave patterns, with waves one, three and five evolving in the direction of the major trend and the second and fourth waves unfolding in a correction or opposite direction of the major trend.
Toth believes the fifth wave could have completed at the Aug. 25 high.
Bottom line? "There are a confluence of factors" that traders should be aware of, according to Toth. If ICE October sugar were to retreat below 19.09 short-term, Toth added that "I think most traders will want to neutralize long exposure."
In order to definitively break the four-month uptrend, however, the ICE October sugar contract would need to settle below the key 17.51 support level in the days or weeks ahead, he concluded.