The Smart Money Loves Natural Gas Here! Going To $4?

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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