I’ve been watching the sugar market for several weeks now and see a good opportunity setting up. Sugar has been looking bullish from a fundamental perspective for some time, and technical indicators are telling me now’s the time to buy.
Fundamentals are supportive of more price gains ahead. India, the world’s largest exporter, looks to see a production shortfall of about 10 percent lower than initial forecasts of 18-20 million metric tons. According to a Bloomberg article, lower-than-expected production may force India to import 1 million tons, its first market purchase in three years. Last week, India’s federal cabinet approved a proposal to allow mills to import sugar duty-free for sale domestically. These new rules lift limits on the quantities mills can buy abroad. Neighbor Pakistan also announced plans to purchase 200,000 tons of sugar to bolster supplies and reduce domestic prices.
Australia, the world’s second-largest exporter of raw sugar, is expected to see significant rainfall this week. Flooding could lead to crop damage there, adding to the supply crunch.
From a technical point of view, the market is approaching resistance near 13.36 cents a pound and looks headed for a breakout after two days of gains. Sugar is trading above most major moving averages, including the 13-, 26- and 50-day moving averages. The MACD has been turning up and looks to be strengthening as well.
At this time, I recommend considering a July call spread, which expires June 15, 2009. Buy the July 13.50 call and sell the 16.00 call for a price of about $750, not including your commission costs. That is your defined risk on the trade. Your maximum profit potential is $2,800, minus your commission costs.Technicals project a target of 16 cents.
Please feel free to call me for more information on this strategy, or others to suit your particular account size and risk-tolerance.
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