When it comes to the market, there is no holy grail that will always
tell you when to buy or sell. It doesn’t exist. In my experience, the
real value is in the weight-of-the-evidence. We don’t just look at one
data point. I want to see momentum, sentiment, trend and most
importantly price action. When everything lines up, then we can
calculate the risk and figure out whether the risk vs reward meets our
strict standards.
Today I want to point out what is currently happening in Natural Gas
futures. This is a market that for the most part I have not touched in a
long long time. Ever since this hit our upside target above $6 a year
ago, I haven’t seen any reason to bother with it. Long-time readers know
that this is a market that I loved for a long time throughout 2012-2013
(see
2/12 &
4/12). But since then I’ve been quiet. There’s been nothing to say.
The latest Commitment of Traders Report suggests to us that the,
“smart money”, is buying at a near record rate. The numbers are over
210,000 contracts net long from the commercial traders and quickly
approaching a new record. From a more broad based sentiment gauge, the
community hates it. Our data suggests that we are at the most
pessimistic levels towards Natural Gas in over 5 years. It’s this sort
of potential sentiment unwind that draws my attention.
Now, the most important thing obviously is price. The sentiment is
great and all, don’t get me wrong. But only price pays. And this is
where things get interesting. Here are Natural Gas futures breaking down
below support from January and putting in fresh lows throughout the
first half of February:

But a funny thing happened last week. Prices came roaring back, not
just back above this key support from last month, but now above an
important downtrend line from the highs in November. Natural Gas
basically got cut in half in just a few months. I think based on the
brief breakdown and quick recovery, we could be in store for a nice
rally with well-defined risk. There is no reason to own this if we are
back below the downtrend line from November. That’s my line in the sand.
Moving on, it only gets better. Momentum is something we take very
seriously. When prices make new lows, particularly in a strong
downtrend, and momentum simultaneously puts in a higher low, this is
what we call a “Bullish Divergence”. In my opinion, this is precisely
what we have here.
Let’s recap:
- The Smart Money loves it and is buying aggressively
- Everyone else hates it
- Momentum put in a bullish divergence this month
- Price put in a failed breakdown (From failed moves come fast moves in the opposite direction)
- Futures basically got cut in half in 2 months so a mean reversion is likely
- The downtrend line from the November highs has now been broken to the upside
- The risk is very well-defined
- No one is talking about it
I like it…..I think we go to 4
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