Sugar Update: Possible Bullish Action Ahead

Sugar (SUGAR/USD) has been in a downtrend since it generated a lower high of 0.32358 in July 2011. This capped off an impressive bull run that saw the market climb from $0.10 in December 2008 to its 10-year high of $0.36353 in February 2011. At that point, the market started to show signs of weakness. Little did investors know that it was the beginning of a long and painful bear market.

As a matter of fact, this commodity is back to where it started a decade ago as the market is trading just above $0.10. To a newbie, this price action may mean that Sugar is hopeless. In reality, however, the drop to this level may offer a rare chance for a significant bounce.

In this article, we show how there’s a possibility of bullish action for Sugar.

Sugar Drops to Long-Term Support

$0.10 is a very important price point for Sugar. Bulls have been defending this level since June 2008. The market has managed to bounce every time it touched this level. Technical indicators show that bulls are likely to do the same again.

Weekly chart

A quick look at the weekly chart shows that this commodity is at the apex of its falling wedge as it trades just above its long-term support. The expected increase in demand at this level should help bulls preserve the support as well as generate the momentum needed to break out of the wedge.

Also, we have to take into account the emergence of a bullish divergence. This affirms our view that a bullish breakout is very likely.

Emergence of a Descending Triangle

Ironically, our bullish point of view stems from the formation of a bearish pattern. A look at the monthly chart reveals that Sugar is creating a large descending triangle. The triangle appears to be concluding the D wave currently. Upon completion of this leg down, a rally often takes place as participants buy the support. This should set off the E wave of the triangle.

Monthly chart

To be clear, Sugar is still locked in a multi-year downtrend. Even if it breaks out of the falling wedge on the weekly chart, a clear reversal won’t occur unless it breaches the downtrend resistance. However, the E wave should open up the possibility of short to medium term bullish action.

Projected Move

Barring a massive bullish uprising, we expect Sugar to rally to the 23.6% Fibonacci level. At that point, bears will likely assert their dominance and defend the downtrend resistance. The conclusion of the E wave would trigger the resumption of the downtrend.

Projected move of Sugar

Bulls will once again try to defend $0.10 but the added pressure from the new lower high should be enough to take out the support. This will likely create panic and trigger a waterfall event that may send Sugar down to its historic support of $0.06. At that price point, Sugar would have lost over 65% of its value from the 10-year high.

However, we believe that $0.06 would be the last stop of this downtrend. Such heavy losses will likely embolden bottom pickers and bargain hunters. From the ashes, Sugar will carve a bottom which would serve as the base of a new bull run.

Bottom Line

Sugar is currently locked in a multi-year downtrend. However, the drop to the long-term support area and the conclusion of the D wave of the triangle open up the possibility of short to medium term bullish action. After this bounce, we expect the market to resume the downtrend until reaches its historic support.

Featured image courtesy of Shutterstock. 

Kiril is a CFA Charterholder and financial professional with 5+ years of experience in financial writing, analysis and product ownership. He has passed all three CFA exams on first attempt and has a bachelor's degree with a specialty in finance. Kiril’s current focus is on cryptocurrencies and funds, as he does his own crypto research and is a Product Manager at Mitre Media. He also has his personal website, where he teaches people about the basics of investing. His ultimate goal is to help people with limited knowledge of finance and investments to create investment portfolios easily, and in line with their unique circumstances.