Today I present for your consideration my two best summer futures trades.
However, before we get into specifics, you should ask why should you follow my lead?
Whenever you read a predictions article, you need to consider the writer’s motivation for sharing his or her pearls of ‘market wisdom.’ In my case, will I personally benefit if you gain financially? Not likely. I trade commodities, and the commodity markets are just too big for you or I to move them. There’s no insider trader info…at least not for you and me.
Years ago, when I wrote a regular column, my primary motivation was to acquire new clients. However now, over 30 years later, I rarely write new articles and rarely get new clients. Most of my clients have been with me for decades, I don’t advertise or have a PR firm, and I rarely open new accounts.
So then why share my ‘wisdom’ here? I really had to think about this question, but I concluded the best answer is there is a degree of satisfaction when one is proven right publicly. Putting this ‘out there’ raises the stakes because it’s ‘out there.’ I’m no psychologist, but I think that might be it.
Now perhaps it’s presumptuous of me to assume I will be right. We are dealing with the unknown after all and time will tell. But one thing I’ve learned is that ‘common wisdom’ is not wisdom that will enrich you. So I try to look for situations that go against the common wisdom.
OK, here we go; I have one short for you to consider and one long. And this is no global-play; it’s more of a domestic-play.
My best summer long trade for this year: Natural Gas.
My best summer short trade for this year: Natural Gas.
Misprint? Nope, my research over the past 20 years indicates (but feel free to prove this to yourself) over 80% of the time there has been a tradable long opportunity plus a tradable short opportunity in the natural gas market based on seasonal tendencies.
You see, most years it gets hot in July and demand for natural gas for cooling increases. Then after a summer rally, in short order, the futures anticipate the approaching lower demand autumn season and drop.
Specifically;
1. The ‘Summer Long’: In the past 20 years, the natural gas futures market offered a tradable, profitable long opportunity over 80% of the time, with the bottom forming sometime in the first few weeks of July. The majority of those years the market bottomed either side of the second week of the month, with an average rally of 10% from the lows (=$3,600/futures contract at current prices) This July rally generally reached it’s conclusion by the end of the month.
2. The ‘Summer Short’: In the past 20 years, following a peak (generally formed during July), the October natural gas contract has registered a new ‘lower low’ over 80% of the time before expiration. This has resulted in many thousands of dollars per contract on the short side of the ledger.
Still, your actual profit or loss gets down to timing. So how do we time this?
In my recent book, Trading Commodities, I introduced a simple means of catching the trends. I termed this my ‘pivot indicator’. It involves using a 10-day moving average to determine the trend combined with market momentum. We can use my ‘pivot indicator’ for timing. The gist is to wait for a natural gas close during this month above the 10-day simple moving average to be a buyer. And, we’re looking for a move of at least 10% (on a non-leveraged basis) from the July low as a target. Reverse the trade to short on a 2-day close below the 10-day, looking for a minimum 10% move back down, but likely more and targeting new lows for the move.
Of course these trades are not guaranteed, let the market confirm these set-ups for you, and if the market tone changes you and I can change our minds. However, armed with this knowledge I believe we can place the odds nicely in our favor.
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