Last week’s price action in energy unfolded just as we expected. Money poured into stocks with the focus being on small caps, banks, and technology stocks. The fact that these sectors are showing strength while utilities, health care, and consumer staples lag is a good sign that investors are once again taking risks in the market.
Because investors and traders are bullish on the stock market again, the money flow into the safe havens like precious metals and energy has decreased. I believe this is the reason stocks moved up last week while precious metals drifted lower.
Below are weekly charts of natural gas, crude oil, and the dollar, showing what I think is most likely to happen in the next few weeks and what should fuel the fire.
Natural Gas: Weekly Chart
Natural gas has been out of favor for the past three months with most of the selling happening recently, as seen on the chart. In my opinion, natural gas is oversold and about ready for a bounce.
The price of gas is now trading at a key support level, but until the selling momentum stops and reverses back up, I would steer clear of this commodity play. Natural gas is known for taking people’s money time and time again, so trade this commodity very carefully.
Crude Oil: Weekly Chart
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Natural Gas: ‘Tis the Season
Natural gas’ seasonal price action shows that the price tends to strengthen between February and April. So with NG at support and us being in March, you can guess what I’m thinking. Higher prices are where the odds are pointing.
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Crude Oil: ‘Tis the Season
It’s the same story as natural gas above, and higher prices seem to be where the best odds are.
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Energy Trading Conclusion
As a technical analyst, the above charts are pointing to higher prices in the coming weeks for natural gas and crude oil, which is exciting for us all. But when things are this perfect looking, we must be very cautious as the market has way to suck traders into these “perfect” setups and spit us out a couple days later for a nasty loss.
Understanding how the market moves is crucial for avoiding and/or minimizing losses when trades go against us. That is why I continue to wait for my signature low-risk setup before putting any money to work.
My focus is to take the least amount of trades possible each year, only focusing on the best of the best setups. My low- risk setups require risk downside risk to be under 3% for the investment of choice, and the broad market needs to be showing signs of strength as well. I use several different types of analysis to confirm if a setup has a high probability of winning, and those that do are the trades I take along with my subscribers.
It is very important to wait for the market to confirm a move higher before taking a position when there is this type of setup. The market could go either way quickly, and jumping the gun is not a safe bet.
By Chris Vermeulen of TheGoldAndOilGuy.com
