Sugar's In The News

09/08/09 09:47:24 AM

by Mike Carr, CMT

With sugar near 28-year highs, many individual investors have their first opportunity to invest in the commodity directly.

Security: SSG
Position: N/A

Sugar has been traded since at least the early 1970s on futures exchanges. Figure 1 shows that it reached its all-time high in 1974 and traded in a fairly narrow range for most of the next 30 years. News reports are bullish, and getting more so.

FIGURE 1: SB-067, YEARLY. Sugar futures have a long trading history, but this commodity has rarely offered traders a great deal of volatility.

Graphic provided by: Trade Navigator.

A little more than a year ago, an exchange traded note (ETN) on sugar began trading. The iPath Dow Jones-AIG Sugar Total Return Sub-Index ETN (SGG) seeks to reflect the returns that are potentially available through an unleveraged investment in sugar futures contracts as well as the rate of interest that could be earned on cash collateral invested in Treasury bills. Through ETNs, individuals can trade commodities without the risk found in leveraged investments.

Figure 2 shows why investing in futures can be so dangerous. While prices surged higher, the relative strength index (RSI) and the moving average convergence/divergence (MACD) formed bearish divergences. The sharp drop in price before Labor Day took the RSI below its moving average (a sell signal) and dropped MACD below 0 (another sell signal).

FIGURE 2: SGG, DAILY. The daily chart of SSG shows that trading only the news can lead to large losses.

Graphic provided by: Trade Navigator.

Individuals should be careful when using ETNs to trade commodities. The technicals can be at their most bearish when the news is at its most bullish. These markets offer great rewards, and even greater risks.

Mike Carr, CMT

Mike Carr, CMT, is a member of the Market Technicians Association, and editor of the MTA's newsletter, Technically Speaking. He is also the author of "Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing," and "Conquering the Divide: How to Use Economic Indicators to Catch Stock Market Trends."