Sugar Mean Reversion

When I don’t have much conviction in terms of the Major US Indices, I turn to other markets to look for non-correlated opportunities. I’ve been stalking Sugar futures for a long time, but recent price action has begun to suggest that the mean reversion we’ve all been waiting for is finally ready to get going.

First off, public sentiment has been bumping up against multi-year lows for the past year or so and commercial hedger positioning is at multi-year extremes on the long side (though relatively flat in terms of net positioning). In terms of seasonality, we’re coming out of the 2nd worst month of the year for Sugar and entering a 3 month period that has, on average, seen positive returns.

Given that relatively bullish backdrop, let’s take a look at price.

chartIt’s clear from the weekly chart that prices are in a structural downtrend, but have started to gain traction at a key level of support. After a brief false breakdown below the ’08 lows, prices moved higher off of this confluence of support while momentum positively diverged. I’d like to see prices close the week at the highs, but there’s no doubt that this is constructive action. chart

On the daily chart we can see prices spent the past two to three weeks basing above support at the 161.8% extension of the June-July rally as momentum positively diverged. Earlier today prices confirmed a false breakdown after closing decisively back above this trendline. With prices roughly 22% below their 200 day simple moving average, there’s a lot of room here for mean reversion. I do expect some resistance at prior support areas like 11.40 and 12.20, but we’ll have to see how price reacts to those levels if/when they get there.chartOn the hourly chart we can see the base that prices have formed over the past few weeks and the subsequent breakout that was sparked by an island reversal earlier in the week. Another positive is that we’re also seeing momentum get into overbought territory after being in a bearish range on this timeframe for quite a while. Despite those positives, a downward sloping 200 hour simple moving average continues to be a concern. I’d like to see prices consolidate above the breakout level around 10.70 to allow this moving average to flatten out, begin rising, and start providing a major tailwind for prices.

The Bottom Line: If you’re searching for a non-correlated setup with a “sweet” risk/reward, then Sugar futures might be a good place to look. I’d like to see prices consolidate a few days between 10.70-11.10 to allow the 200 hour sma to flatten out and begin rising, as that, in my opinion, is one of the few remaining headwinds for this market. Given that context, I only want to be involved in this market above 10.70, preferably with a rising 200 hour moving average, with a target up toward the 200 day.

As always, if you have any questions feel free to reach out and I’ll get back to you as soon as I can.