From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
The relentless outperformance from commodities and commodity-related assets shows no signs of slowing.
The CRB Index is up 27.03% year to date while the S&P 500 and the 30-year Treasury bond aren’t even in the ballpark, posting lackluster performances of negative 4.95% and negative 6.25%, respectively.
Commodities are really the only game in town these days.
With that as our backdrop, we want to continue focusing on this asset class for buying opportunities.
As many of these contracts consolidate or correct following explosive upside moves, we’re paying extra attention to those that have been basing in recent months – such as natural gas.
Let’s take a look.
Here’s a zoomed-out weekly chart of natural gas futures:
One thing commodities aren't short on is big bases – and natural gas is a great example.
It’s carving out a decade-long base below a key area of overhead supply around 6.20. Last October, the bulls challenged this level of former resistance for the third time, only to be rejected yet again.
Following a steep correction in recent months, it looks like we’re headed for a fourth test.
The more times a level is tested, the more likely it is to break. We think it’s just a matter of time before the bulls absorb all the overhead supply and force an upside resolution.
The current uptrend is clear when we look closer at the daily chart:
Price is moving up and to the right – expanding and contracting as it carves out a series of higher highs and higher lows.
Right now, it’s going through a period of contraction as it builds a multi-month base below its highs from last October.
If and when it resolves higher, it will not only complete the consolidation going back to last fall, but it will also mark a breakout from a massive base.
We think fresh 12 year highs are what’s next for natural gas.
We want to buy strength if and only if we get a decisive breakout above 6.46 with an initial target near 8.25.
Keep in mind "the bigger the base, the higher in space," so plenty of upside potential lies ahead once we get a decisive breakout.
That’s more or less the case for the entire commodity space as we’re in the early stages of a major bull run.
Some contracts have already completed primary trend reversals, while others challenge critical breakout levels that have acted as resistance for more than a decade.
Natural gas fits into the latter category. But it warrants our attention right now as we believe a breakout is imminent.
Stay tuned!
Be sure to check out our COT Heatmap and Trade of the Week below.
COT Heatmap Highlights
- Soybean Meal: Commercials reduced their shorts last week but hold near three-year extremes.
- Orange Juice: Commercial hedgers continue to position themselves near their three-year-record short position.
- Japanese Yen: Commercials are less than 4% away from a three-year net-long extreme.
- Crude Oil: Commercial hedgers increased their long positioning by more than 20,000 contracts last week.
Click here to download the All Star Charts COT Heatmap.
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