A Sweet Seasonal Tailwind

From the Desk of Ian Culley @IanCulley

Seasonality is not the most heavily-weighted data point in my analysis.

It doesn’t even make the top three: price, price, and price.

Nevertheless, tracking seasonal patterns has proven quite valuable in past experiences, especially regarding commodities. (We discussed it today on What the FICC, outlining three strong seasonal tailwinds heading into the fall. Check it out below.)

Raw materials are clearly affected by the earth’s rotation around the sun. 

And while these trends fail to produce explicit entry or exit signals, they do provide insight into potential market conditions (not unlike sentiment or COT positioning). 

I use seasonality to help guide my focus to those areas of the market that deserve additional attention. Areas such as…

Sugar!

I’ve been watching sugar futures since the beginning of the year, waiting for a breakout. 

And boy, did it deliver!

Check out the weekly sugar futures chart highlighting the March breakout and subsequent consolidation:

Sugar has been on a tear. And it looks poised to resolve higher from a potential multi-month continuation pattern.

Interestingly, the sweet stuff has completely disregarded seasonal headwinds this year. 

Here’s the seasonality chart for sugar broken down by average monthly return:

March has been the worst-performing month for Sugar since 1961. But that didn’t stop sugar futures from going vertical this spring.

August represents another poor month for sugar bulls, yet they still drove positive gains last month.

If Sugar can’t catch lower during its weakest months of the year, what will it do as it enters its strongest seasonal period (Sept. and Oct.)?

I have no idea. Seasonality is not a Magic Eight Ball.

But I can’t take my eyes off this sugar chart:

The continuation chart bounces between two key extension levels, with the upper boundary at approximately 26.15.

A break above that level could flash a buy signal. But I’m waiting for a close above the Oct. contract’s June high of 26.33.

I’m long targeting 31.50 if and when it takes out that level. 

Based on the seasonal trends over the past sixty years and the unseasonal strength so far this year, sugar could reach our target in no time!

But all those potential seasonal tailwinds have no direct impact on my conviction until sugar breaks above my risk level.

Stay tuned!

COT Heatmap Highlights

• Commercials carry their largest short position for Cocoa in three years.
• Commercials remain near record-long position in Palladium.
  
• And commercials carry a significant short position for Heating Oil

Click here to download the All Star Charts COT Heatmap.