The October sugar futures contract has gone nowhere but down since becoming the lead month near the end of June. Some of this has been due to seasonality and some of it has to do with the considerable resistance that has built up between $.19-.20 per pound area. However, both of these may be currently working in favor of the long side.
Seasonal Factors At Play
The typical October sugar seasonality at this time is characterized by weakness through the middle of August followed by strength into expiration. Each of the last five years has demonstrated this pattern very clearly with 2011 being the only year a purely seasonal play would have lost money. The other four years would have more than made up for it 2010 putting on nearly $.04 itself, almost $4,500 per contract. Interestingly, 2010 was the only year in the last five where commercial traders were active sellers through the mid-August through September period. We’ve posted the last five years’ seasonality along with the commercial position, here.
What’s Happening Now
This year, as with four of the last five years, commercial traders are actively buying the October sugar contract. The decline in October sugar has led to end user and processor purchases in each of the last seven weeks as they lock in their future input prices. We expect this buying to halt the market’s decline sometime soon and force the market to turn higher into expiration.
Trading Tactics
Waiting for the market to turn is the key. We’ll use resting buy stops to trigger our entries. This prevents us from fighting the current downward trend and will hopefully get us long the sugar market as the short positions are stopped out thus, adding upside momentum to our trade upon its inception. As always, we’ll risk the trade to whatever the swing low turns out to be on this current move.
