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David Becker

Natural gas prices whipsawed on Tuesday, as prices tested 3-year lows. Sentiment clearly remains negative, and the forecast of warmer than normal weather during the next 2-weeks emboldens trader’s who are bearish. Traders are pricing in a substantial increase in natural gas stockpiles relative to the last 5-years.

The short-term picture for natural gas prices remains negative despite Tuesday’s whipsaw price action.

The rebound in prices from $1.83 was very impressive and was likely a hedge fund taking profits after a robust gain. The weekly chart of NYMEX natural gas shows that prices rebounded ahead of the 2016 lows at 1.61.

This could be a target price and could potentially be breached if inventory growth pushes through the 5-year average high. The trajectory of inventory levels points to a break of the 5-year high, which might be a reason for prices taking out the 5-year low in price at $1.61.

The technical outlook remains negative, but, on a short-term basis, prices are oversold. The fast stochastic has generated a crossover buy signal in overbought territory. The RSI is printing a reading of 36, which is above the oversold trigger level.

Weekly momentum is negative as the MACD (moving average convergence divergence) index recently generated a crossover sell signal. Prices broke down through trend line support and the capitulation by some natural gas bulls was offset by those who were taking profits.

Managed Money Remains Short

The rebound from the weekly lows at 1.83, was likely a hedge fund buying back a short position. With the robust levels of hedge fund shorts, you need to be careful that a short-squeeze does not turn into a market route. As prices move toward the 2016 lows, there will likely be several fits and starts as managed money looks to cash in.

 

Hedge funds added to their short position in futures and options according to the latest commitment of the trader’s report released for the date ending 1/14/2020. According to the CFTC, managed money increased their short position in futures and options by 28K contracts while also increasing their long positions by 8.7K contracts.

The open interest that is short futures and options is 2.73 larger than the open interest that is long in the managed money space. You can see why hedge funds need to be nimble when exiting their short positions. One forecast of an extended cold weather period could generate a short squeeze.

The choppy nature of price action as we approach the $1.61 will make trading difficult. Selling into a rally might be a prudent approach. Catching the diving knife, if you believe prices will move higher, is a risky trade.  Wait for a cold-weather forecast before you bet on higher prices.

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