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Strategic trade
Trade view / 01 September 2016 at 11:20 GMT

#SaxoStrats: Mean-reversion ahead in sugar?

Head of Commodity Strategy / Saxo Bank
Denmark
Instrument: SUGARNYOCT16
Price target:
Market price:
SaxoStrats
Background

Look away now if you only focus on fundamentals! Sugar traded on New York’s futures market is currently up by 32% year-to-date. The outlook for a world supply deficit in both 2015-16 and 2016-17 has been the main reason behind the surge, which primarily occurred during the second quarter. The International Sugar Organization has said that the rally has further to run with world inventories at critically low levels despite foreseeing a rise in output. 

Since reaching a peak on July 5 at 21.22 cents/lb, a near four-year high, the sweetener has since been settling into a range gravitating around 20 cents/lb. 

Hedge funds have been a significant market participant this year. Despite seeing the market trading sideways for the past three months, they have continued to add to an already record net-long position that currently sits at 281,409 lots. A position this size corresponds to 14.3 million tonnes or 8% of annual consumption (USDA). It also corresponds with 3.5 days of the total traded volume on the futures exchange. The graph below also shows that the gross-short (red line) in the market has been almost wiped out, leaving the long to short ratio well above 20. 

Sugar
 
Such a scenario can be maintained as long the technical outlook continues to support. The bulk of the speculative long in the market focus more on the technical picture than fundamentals and if that turns negative the price will be impacted. 

Sugar (short-term chart):
Sugar

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Source: Saxo Bank 

Management and risk description

This is mean reversal trade based on extended one-sided positioning with fundamentals currently not supporting weaker prices. From a seasonal perspective sugar has been rising in four out of the last five years during September.

On hitting the first target lower the stop on the remaining to a trailing stop of 0.60 cents. 

Sugar (long-term chart):
Sugar
Source: Saxo Bank  

Parameters

Entry: sell SBV6 or SUGARNYOCT16 on a break below 19.60 cents/lb.

Stop: stop: 20.20 cents/lb (1 ATR).

Targets: 18.70 and 17.90.

Time horizon: three to four weeks (The October contract expires at the end of September).

— Edited by Michael McKenna

For more on commodities click here.

Non-independent investment research disclaimer applies. Read more
01 September
Ole Hansen Ole Hansen
Heavy selling has been seen following the break below 20 earlier. The stop entry level at 19.60 has been hit and this trade idea is now live.
01 September
Market Predator Market Predator
"Heavy selling has been seen following the break below 20 earlier." Mr. Hansen, are you talking about COT or Option market, where it has been seen, please?
Long to short ratio well above 20 in COT is super Bullish so we really need significant break in trade line. Maybe to check volume might help"?" I like your trade management. Profit at 38 or 50 FIB level. Very nice trading Idea, Ole. Thx.
02 September
Ole Hansen Ole Hansen
Traded volumes in the futures market jumped to 200,000 lots yesterday from a recent average of less than 100,000 lots. Most of the pick up in volume was seen following the break below 20
02 September
Ole Hansen Ole Hansen
An equal sharp recovery has returned the price to 20.20 which was our exit level
02 September
Market Predator Market Predator
Hello Ole, thanks for the update. I can read about 100K volume in yesterdays bar. You mentioned 200K. Do I interpret this chart wrong way? There is no difference in contract SBV6 comparing continuous SBc1 concerning volume.
As I squawked to your profile 29 July 2016 at 7:04 GMT (you were 3Wks off work) understanding volume in continuous chart is still black box for me :(
02 September
Ole Hansen Ole Hansen
I was looking at the aggregate volume across all months, hence the discrepancy
02 September
Market Predator Market Predator
Aggregate volume across months it's also new info for me. With You nice weekend, MP :)

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