Where soft commodities are going - and how to profit
Sep 10, 2009
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When you have a mix of bullish fundamental factors backed up by the usual bout of speculation, you've got a juicy recipe for higher prices.
The commodities world is a prime example of this. And nowhere is this trend more evident at the moment than in the sugar market.
Sugar prices are currently hitting highs not seen since early 1981, driven largely by a projected fall in crop levels in the world's two biggest sugar-producing nations - Brazil and India.
While this fundamental data is critical, it's nothing without also looking at the chart, which tends to factor in all the price drivers. As you can see, the current state of the sugar market reflected in the October futures contract. Check out that Mount Everest-like climb!
'Exhausted' sugar market could be set to come down off its high
When markets "go vertical" like this, the move is most often followed by a quick sell off in order to relieve some of the overbought pressure.
Up to now, sugar has stubbornly bucked the trend and continued to move higher.
However, take a look at the most recent price spike - to $0.2500 cents per pound - and match it to the RSI (Relative Strength Indicator) at the bottom of the chart. The fact that the RSI didn't fully confirm the price rise could signal that the market is exhausted and on the verge of topping out.
Whether you're bearish or bullish on sugar, you can play the market through option contracts that trade on the floor of the ICE/NYBOT exchange. At the moment, I suggest playing the March 2010 option contracts, as they're the most active.
If you choose to go the futures options route, stick with limited-risk option spreads. These will keep your costs lower and heighten your longevity in the trade if the market happens to move against your prediction.
You want a market that can make millionaires in a short amount of time?
Get rich with grains
As we amble into the end of the summer, it signals the final flourish of the prime growing (and moneymaking) season for the grains market.
Corn, wheat and soybean prices can all heat up during the summer, given that the season is such a crucial period. Even the slightest hint of weather issues that could hamper crop yields can turn the markets on a dime.
And history has shown that the grains market can make quick millionaires if the market happens to move in your favor. It's this dream of riches that encourages speculation year after year.
This time around, we've seen favorable weather conditions, which have pushed corn and wheat prices down to new lows on an almost weekly basis. This increases the chances of a powerful bullish move.
Playing corn's upside
So while government reports show ample planting intentions, high carry-over levels from last year, and better than expected crop yields, much of this is already factored into the prices. This is an almost mirror image of what we're seeing in the sugar market.
I maintain the position I took two weeks ago with regard to the corn market: "If any potential weather disruption does occur over the next few months, taking a bullish position here could be a low-risk way to get involved."
Corn options trade on the floor of the Chicago Board of Trade (CBOT). Like with sugar, limited-risk option strategies are the best way to play your price prediction. Go for the December 2009 or March 2010 expiration months in order to give yourself plenty of time for a bullish move to get underway.
• This article
was written by Lee Lovell and was originally published in the free daily investment newsletter the Investment U e-letter
on 7 September 2009.
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