In a note dated 28 May White Gold or Sugar High indicated we were looking for a major bottom in Sugar prices during June. We however noted that we would be disciplined and patient and wait for the price action to validate this view. The price action since has been supportive and we look to take an initial position (25% of total intended position) now.
Chart 1 - June was a key reversal month. A weekly/monthly key reversal has a reasonable track record of indicating a trend change. An upside reversal bar (bullish) occurs when there is a lower low than the previous month and then a close at or above the previous months highs. It typically follows an extended decline and should be supported by strong volume. Note there have only been 2 key reversal months over the last 3 years, the first was a downside key reversal (bearish) at the peak in February 2011 and then the upside key reversal (bullish) in June.
We will look for further validation to deploy an additional 50% of total position size and ideally at higher prices. The remaining 25% will be allocated on pullbacks into a defined uptrend. The following developments will trigger part 2 of the trade.
Short term:
- a change in trend is usually associated with a reversal pattern. A potential reverse head and shoulders pattern has been forming over the last 2 months. We need a break above $21 to confirm the pattern and provide further validation to the June bottom. The volume pattern is supportive of a reverse head and shoulders formation.
- The Aroon up has surged to 100 providing warning of a rally.
- The ADX is confirming positive price but needs to get above 25 to provide a trending signal - higher prices with a trending signal
- Prices have broken through the 50 DMA which is positive, a stronger signal will be break through the 200 DMA with the averages flattening and then turning up
Medium term
The weekly chart below is approaching several points of resolution:
- The pattern of lower highs over the short term and higher lows over the longer term is approaching resolution
- A break out of this pattern should result in a sustained move in that direction
- A weekly MACD buy signal will be important validation - it doesn't always lead to large moves but often does and is generally a reliable indicator
Brief update on markets:
Equities
We think global equities can continue to rally from here, however the upside potential is limited and downside potential is significant. This latest rally if it materialises will be the tail end of an overall topping and distribution process that began over a year ago.
Bonds:
We are standing aside here - while we deflationists we see significant risk and prefer to not entrust governments with our capital at this juncture.
US dollar:
The cyclical rally is intact and we expect it to resume during the third quarter of 2012. Capital will continue to flow out of Europe and GEM to the "safety" of the US (for now)
Gold:
Seasonality will be against gold over the next few months but central bank buying is an underpin. A sustained break below the 20 month MA and move into the lower half of Bollinger bands will have us worried and a break above the 30 week moving average will have us adding to positions.
