Market: Natural Gas, $NG_f, NGV13 (mini $QG_f)
Buy or Sell?: According to the Commodity Trader’s Almanac, late July is one of the best times to go long natural gas. Our charts seem to be confirming the premise.
Range: We can’t rule out a quick probe below $3.40, but we believe the market is trying to form a base.
Natural gas is well supplied but demand could pick up, seasonals call for bullish positions
The seasonal low in nat gas tends to be late July; from there the market is often well supported into December. Although this pattern has struggled in recent years, it worked like clockwork in previous decades. We are of the opinion that the seasonal pattern was simply on hiatus as the world absorbed the new reality of fracking induced over-supply.
Not surprisingly, during the downturn large speculators have accumulated substantial short positions. According to the latest report by the CFTC, this group of traders were net short over 100,000 contracts. This opens the door for a short-covering rally.
Similarly, the price of nat gas has retreated about 50 cents in price in a few short trading sessions and has quickly found technical support levels. We can’t rule out a probe below previous support near $3.40 in the October contract, but we suspect these levels will eventually hold.
Natural gas is a treacherous market; simply buying a full-sized futures contract is not ideal for most of our clients (even those with sizable accounts might not enjoy the volatility). Instead, we feel like the best way to try to play the upside in this market is with a mini futures contract.
The mini contract is 1/4th the size of the original; accordingly, it makes or loses $2,500 per $1.00 price movement in natural gas. In other words, for every cent in price movement natural gas makes, a trader will make or lose $25 per mini contract.
To put this into perspective, if you buy a nat gas mini futures contract at $3.50 and we do run sell stops down to $3.35, your loss will be about $375. If the market recovers, as we believe will be the case, we believe $3.80 is possible. This would be a gain of 30 cents, or $750.
The margin on mini natural gas futures is $647.