The holiday markets are typically characterized by low volume choppy and counter-trend trading activity. This is primarily due to the slowdown of investment funds of all sorts due to year end accounting and the personal squaring of one’s books. Post-holiday markets tend to resume their previous movement as investors of all types return to the markets in the New Year. This can be used to your advantage, if you know what to look for. Today’s example in natural gas futures is a classic pre-holiday, post-holiday trade.
The chart below contains just over a year’s worth of data. The beginning of the downward sloping trend line marks the last meaningful high in this market at $5.448 last October. Meanwhile, the market declined all the way to $1.80 by December 18th of this year. That’s a fall of more than two-thirds! Worse yet, it doesn’t look like the pain is over in the natural gas complex. Which brings us to the current situation.
February natural gas futures bottomed Friday, December 18th at $1.802 leading into the holiday week. Over the last week, natural gas futures have rallied more than 15% from the bottom through the Christmas high at $2.10. Typically, this would be a nice rally and certainly something for the short contracts to get antsy about. In spite of last week’s impressive performance, open interest only declined by .004%. Four thousandths of one percent. No one cared. Furthermore, this rally has yet to even reach the 40 day moving average, which now comes in at $2.335 as compared to Friday’s close of $2.079. Additionally, the commercial and large speculative positions have barely budged with both of these trader groups at mid-levels for their recent trading behavior. No one cares. No one cares because this market is in balance…and the balance price is lower.
This brings us to Newton’s first law of physics. An object in motion tends to stay in motion unless acted upon by an outside force. The motion of the natural gas market is lower. Given the benign temperatures we’ve experienced so far this winter along with an enormous supply glut, we don’t see any chance of a meaningful bounce prior to the typical late January – Valentine’s freeze that’s been such a regular occurrence. For all of these reasons, and more, we see last week’s natural gas move as a classic holiday counter-trend rally. As such, we are hoping to get this rally sold between the 40 day moving average at $2.335 and the major trend line, now at $2.67 to establish new short positions ahead of the anticipated resumption of this market’s strong downward trend.