NEW YORK (TheStreet) -- Here's a good trade that I think will make money. As pundits debate the merits of the recent stock market activity, it would appear that sugar has consolidated its price action since late January and is now truly moving higher. Though sliding at the time of publication, the recent up-move is demonstrated by the two consecutive gaps up in price over the past couple of trading days on significantly higher volume for the iPath Dow Jones-UBS Sugar Total Return Sub-Index ETN (SGG).
Here's a trading platform for average investors to participate in asset classes that previously were very difficult or risky to enter. Commodities or futures trading has inherent risks, due to the high amount of leverage involved. Now investors can enter these sectors without worrying about being wiped out of all their funds, due to a small adverse price movement. Commodity ETFs allow investors to have staying power in their choice investment and wait for a trend to develop to profit from it.
We'll look at how I would trade SGG, but first check out this chart:
SGG provides returns that are potentially available through an unleveraged investment in futures contracts on sugar. This ETF has fallen precipitously from a high of $107.06 back in August of 2011 to a recent low of $49.25 set in late January. Having recently formed a "falling wedge" technical base, SGG is clearly breaking out above both its 50- and 200-day moving averages over the past two trading days. Both days the volume has been double its normal trading average. This is a strong sign that SGG has more upside to run from its current price of $57.76 at the time of publication.
In addition to being a food additive, an even higher percentage of processed sugarcane now goes to the production of ethanol (approximately 66%). Therefore, sugar prices can be more affected by the economy and demand for oil than the world's appetite for sweets. SGG data by YCharts
There will most likely be resistance at $61.48, but if it can clear that level, then the next target price is in the mid-$66 range. Investors can limit their risk by placing a sell stop below its recent low of the base at $54.41. This allows for more than a two-to-one reward to risk ratio. Should sugar demand continue to grow for all of its uses, then I believe the returns can provide an even sweeter outcome.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
At the time of publication the author held no positions in any of the stocks mentioned.
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