Natural Gas Nearing Major Low

01/09/2020 9:22 am EST

Focus: MARKETS

Carley Garner

Senior Commodity Market Strategist and Broker, DeCarley Trading

Record speculative shorts in natural gas is screaming a reversal should be coming soon, writes Carley Garner.

The net short positions held by natural gas speculators as provided by the Commodity Futures Trading Commission’s Commitments of Traders (COT) data, are nearing record levels. At some point, probably sooner rather than later, there won't be anybody else to sell. As the selling dries, the shorts will look to offset their positions by buying contracts back.

At that time, prices will be forced to reverse regardless of current fundamentals or market opinion. That said, seasonal tendencies are weak through February, so it doesn't make sense to be overly aggressive, but we think it makes sense to have a foot in the door.

Both the Relative Strength Index (RSI) and William’s %R suggest the selling could be nearing an end. Additionally, gas prices have formed a descending wedge with declining volatility, but prices have managed to close above support (see chart below). In our view, this leaves the path of resistance higher.

futures chart

We like the idea of nibbling on small bullish positions in a simple and efficient manner using the mini natural gas futures. These contracts are one-fourth the size of the original natural gas futures leaving traders exposed to $25 in profit or loss for each penny natural gas moves (on most days, it moves 2¢ to 5¢ or $50 to $125 per contract); thus unless we get a repeat of 2016 when gas tested $1.60, the risk and pain should be tolerable as traders wait for the inevitable reversal.

Of course, picking tops and bottoms can be tricky; we can't rule out a probe into the $1.90s, if that occurs the trade would be down roughly $500, and we would likely consider adding on.

Carley Garner is the Senior Strategist for DeCarley Trading, a division of Zaner. She authors widely distributed e-newsletters; for your free subscription visit www.DeCarleyTrading.com. She has written four books, the latest is titled “Higher Probability Commodity Trading.”

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