\*All rights reserved! Redistribution of this publication is strictly prohibited. There is substantial risk of loss in trading futures and options.


*All rights reserved! Redistribution of this publication is strictly prohibited.

There is substantial risk of loss in trading futures and options.

Past performance is not indicative of future results

On the radar:

Natural gas has been in freefall but despite being relatively "cheap" there could be more selling before stabilization.


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Natural gas bulls should be patient...Contango complicates the bottoming process.

Contrarian traders are salivating at the idea of getting bullish in natural gas on the heels of one of the largest natural gas collapses in recent history. However, although we agree the natural gas market is in the process of bottoming, we caution that cheap gas prices might get even cheaper before the market stabilizes. Last month our natural gas analysis was featured on the Off the Charts segment of Jim Cramer’s Mad Money TV show on CNBC (click here to revisit), at the time we were suggesting that the natural gas rally would stall and believed that the bulls should start getting interested on a pullback into the mid-$2.00 area. We never dreamt the retracement would play out so quickly but it has. The December futures contract reached $2.50ish before bouncing; although we think the $2.50 in the front month contract is probably a valid low, the recovery from here will be complicated by the “contango”.

Contango exists in all commodity markets with a normal price structure. It is the idea that the cash market price of a commodity will be cheaper than the first expiring futures contract, and the first expiring futures contract will be valued lower than the second expiring futures contract, and so forth. The difference between these two prices is the cost of carrying the commodity between now and the expiration date of the futures contract; these costs include storage and insurance of the commodity. To illustrate, the December natural gas futures contract is trading near $2.75, the January contract is trading near $2.95, and so on. Accordingly, while the December natural gas futures contract bounced off of $2.50 support as expected, the low in the January contract was near $2.72. We suspect that the process of bottoming in natural gas could mean the January futures contract will need to test $2.50 before the bulls are willing to step in. The December contract expires next week.

Our research shows that seasonal tendencies for natural gas remain weak to neutral through the end of the year. This is in contrast to the assumptions of many who believe natural gas prices should rise in the winter due to increased demand during the winter months. The reality is, much of the demand is accounted for in September and October, well before cold weather sets in. Also, many consumers use natural gas during the summer months to cool their homes and this keeps supply and demand fundamentals in gas more stable throughout than they were in the past.

It should be noted that our friends at MRCI have pointed out the fact that the January natural gas futures contract tends to lose value from November 24th through December 4th. This trade has worked 80% of the time in the last 15 years. This stat confirms our suspicion that the January futures contract will need to retest the $2.50 lows before a sustainable rally can occur. Thus, perhaps a better time frame for the bulls will be in mid-to-late December.

In addition to weak seasonals, we see the potential for some margin call fallout. Volatility in the futures and options markets across the board have triggered trading account margin calls. Margin call selling is blind in that it doesn’t pay attention to market fundamentals, the chart, or any other type of reasonable analysis. The only goal is to liquidate positions to preserve capital; logical behavior comes later.

Looking at the chart of January (not December) natural gas, we see support in the $2.75 area, but given the heavy seasonal tendencies, we expect the current bounce to be short-lived causing prices to slide toward $2.65 to $2.50. If you are a natural gas bull, these are the levels you will want to focus on as potential entry points. That said, oscillators on the daily chart are already oversold. Specifically, the Relative Strength Index (RSI) has dipped below 30 and the William’s %R is in the basement (below 10). Consequently, even if our analysis in regard to a test of the $2.50 in the January contract is accurate, big and volatile bounces will be part of the landscape. Look for resistance in the January futures contract near $3.02 and again at $3.15.


A weekly chart shows clear support in the $2.50 area compliments of a trendline that began forming in early 2016. However, the technical indicators we often rely on for guidance are giving mixed signals. For example, the Williams %R applied to a weekly chart of natural gas is moderately oversold but the RSI is midrange. This tells us there is a probable chance of another leg down before things get better.


As a commodity trader, it is never a good idea to ignore the currency market. This is because a stronger dollar is generally bearish for commodity prices, and vice versa. Since election night the US dollar has been on a tear. We’ve seen the index run almost four full points in less than a week! The rally has been at the hands of expectations for higher interest rates and the proposed trade policies by the President-elect. Yet, we feel like the currency markets are getting ahead of themselves. As we approach the New Year, multi-national corporations tend to move US dollars overseas to cover annual expenses (bonuses, accounting, etc.). Throughout the process, the dollar often weakens. In our estimation, the upside in the dollar will likely be contained near 101.50, but we can’t rule out a possible price squeeze to 105.00ish. In either scenario, a dollar reversal will eventually buoy commodity prices, including natural gas.


In summary, the natural gas bulls should probably be thinking about nibbling on bullish trades but should be prepared for the possibility of one more slide to bring the January futures contract into the mid-$2.00s. Eventually, winter weather will arrive and so with the natural gas bull.

*There is substantial risk of loss in trading futures and options.


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Seasonality is already factored into current prices, any references to such does not indicate future market action.

There is substantial risk of loss in trading futures and options.

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