A Sweet Setup

From the Desk of Ian Culley @IanCulley

I love it when a pattern carries both bullish and bearish implications. It could break out or break down. Either direction works for me.

That’s the beauty of the setup. 

For traders, the directional move doesn't matter. We can prepare for both outcomes. And, lucky for us, sugar futures look ready to swing either way.

Check out the weekly continuation chart of sugar:

Sugar posted a big base breakout followed by a year-long consolidation. This chart looks similar to gasoline, crude oil, and copper – which have all broken down to retest their respective 2018 highs.

It’s reasonable to imagine sugar futures do the same. But we have to see the move before we can take action.

Here’s a daily chart of the most actively traded contract (March 2023):

At first glance, the March contract looks like a topping formation as sugar broke to fresh 52-week lows last month. But those lows didn’t hold, and price reversed higher within days. 

This could turn out to be a false start or a failed breakdown.

If it’s the former, we won’t know until a daily close below 17.44 (the Oct. 3 close). We want to sell weakness toward 15.75 if and when we get a decisive break below that level.

That’s the bear case.

On the other hand, consolidations tend to resolve in the direction of the underlying trend. In this case, that would mean an upside breakout, given the multi-year base.  

This chart is for the bulls:

A close above the August pivot highs of 18.61 confirms a failed breakdown, implying a measured move of 21.75. That’s our entry and initial target from the long side.

We can’t get long until a decisive break above those pivot highs.

Remember, we could see sugar swing either way.  Classical chart patterns and support and resistance levels don’t forecast price action. Instead, they provide clear levels to define risk and reveal the path of least resistance once those levels are broken.

That’s it! Once a trader understands and accepts this reality, it becomes easier to stay nimble and open to all possibilities.

Regardless of direction, we now have a plan to capture the next major move in sugar. That’s exactly how I like it!

Stay tuned!

COT Heatmap Highlights

• Commercial hedgers cut their long exposure to crude oil by more than 15,000 contracts but are within 5% of three-year extremes.
• The unwind is underway in gold as commercials reduced their long position by more than 41,000 contracts.
• And commercials like lean hogs, coming within 7% of their largest long position in three years. 

Click here to download the All Star Charts COT Heatmap.

Thanks for reading! As always, please let us know what you think.

And be sure to download this week’s Commodity Report below!