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Oct. 21, 2005
Sell/Short Sugar
As energy prices have surged during the last few years, the idea of a
gigantic bull market in Sugar has been promoted by a number of commodity
analysts. Sugar, no longer just a sweetener, is more and more being
converted into ethanol for use in internal combustion engines, and
consequently the basic supply-demand equation for this commodity is said
to have changed....Most lately, there is a lot of talk about Brazil (the
world's largest producer & exporter) diverting more and more of its crop
to biofuel for use within its own borders, thus serving to drive world
prices higher....While this may be true, I believe this
market is a big candidate for a major sell-off. My reasons,
in this case, are essentially technical and the best way to explain them
is to show you (which I'm sure will put many of you to sleep).
As I recently pointed out in the Gold market, Open Interest is the total
number of longs (buyers) and shorts (sellers) in any futures market.
Like the markets, a chart of Open Interest never moves in a straight
line, but instead rises and falls as traders enter and exit the markets
over whatever period of time you want to examine....What
stands out on the first chart below is how the number of players in
Sugar has exploded over the past few years, notably most sharply
so during the last six months. This recent surge in Open
Interest had pretty much come on the coattails of the energy markets as
traders jumped on the Oil-is-going-up-forever bandwagon, surmising that
Sugar should be going along as well....
Per Commitments of Traders as of 10/18/05, there are now
268,176 speculative longs in Sugar as opposed to just 56,952 speculative
shorts, which is something of an "overload". While this
does not mean Sugar has to go down, when taken
together with tendency of Open Interest to rise and fall in any futures
market, it certainly suggests the strong possibility of some
sort of long liquidation induced sell-off similar to what I think is
beginning to take place in the Gold market....
Take a look at what I'm talking about....And remember, the bulk of this
buildup is due to speculative longs...
This next chart views Open Interest on a daily
basis going back to March of this year. This may get a little too
technical for some of you but what I am noting here is the recent move
from 10 to 11 cents and the fact that Open Interest was actually
declining as this move was taking place. This is important in that when
you have an upward price move, it is obviously due to buying pushing
that market higher...However, if Open Interest is falling
during that price rise (as is the case here) it can usually be
attributed to Shorts giving up and getting out, as buyers, not NEW
buying coming in...Where anything can happen in the futures
markets, this sort of thing is what does occur at the end of many bull
markets, i.e, the shorts finally give up and then
the market turns south....The next thing you see is buying coming in
again (open interest rising) but the market doesn't really go anywhere,
which is what you can observe as the market now sits here in the 11.50
to 11.75 area.
Next....Volume....In a classic bull move, as prices rise, volume (total
contracts traded) should be doing the same. What stands out very clearly
on the next chart is how prices have recently accelerated but volume is
sliding at the same time. In a nutshell, this also suggests the market
is running out of steam, that all that is maybe holding this market up
now is "the story", NOT strong demand.
It goes without saying there are no absolutes in futures trading and
that everything I have cited here may see the market go higher anyway.
In fact, if I am wrong, I believe I will be VERY wrong, in which case
this is great set up for the "2 & 1 thing". To me, Sugar is either about
to really bust out and suddenly be at 13 1/2 or 14 cents, OR, it's going
to fall out of bed....With the tremendous buildup in Open Interest, the
last thing I'd now expect is sideways, or a creep along in one direction
or the other....I have to say the same reason I generally stay away from
this market is the same reason (among these other) I am now interested
in it: Sugar is usually quite erratic....It can be moving
along smoothly, looking quite "orderly" in what it is doing, then,
"Boom", it suddenly reverses in the opposite direction, in a BIG
way....Which is what I am expecting now....I look for a minimum of 2 1/2
to 3 cents on the downside, taking the March contract shown below to 8
1/2 to 9 cent area.
Brief Looks at Our Other Recommendations
Thanks....Give me a call!!
Bill Rhyne
800-578-1001
770-514-1993
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