From the Desk of Ian Culley @IanCulley
Back in early July, we were looking to buy a bounce in natural gas. Let's just say it was a success, as our target was hit within weeks.
But you have to remember the environment back then. Commodities had experienced a broad sell-off. And natural gas and agricultural contracts such as wheat and cotton had recently experienced drawdowns exceeding 40%.
It might have seemed like a tough call at the time, but for us it was clear. The risk/reward was in our favor as natty pulled back to test a key level. It was that simple.
Fast forward almost two months, and we’re back for more. Our risk is well-defined, and cyclical areas of the market are assuming leadership.
Today, I’ll share how we’re gearing up for a fresh leg higher in natty gas.
First, let’s take a look at the weekly chart of natural gas futures.
Regardless of the wild price swings, the underlying uptrend and base breakout remains intact.
The June sell-off retested the breakout level of this decade-long base, adding to our conviction that this is indeed a valid upside resolution.
In the few months since, bulls have driven natural gas back toward fresh 14-year highs, bringing us to today, where price is coiling around the pivot highs just north of 9.
As long as it’s above 9.05, our structural outlook is higher.
But let’s look at the individual contract on a daily timeframe to pinpoint our execution strategy. Here’s the October contract for natural gas futures $NGZ22:
Before I outline our levels, I want to break down the contract traded.
More often than not, I like to trade the most active contract. For now, that’s October. It’s set to roll based on volume during the third week of September. But that gives us almost a month before we would need to roll our position.
And a month in the natural gas market can seem like an eternity. So we’re good.
When it comes to execution, the June high is our level. We want to buy a break above 9.57, targeting the 2008 highs of 13.70 (highlighted on the weekly chart).
But a daily close above our risk level is a must before we enter this trade.
We have no business being long below the June highs. It’s that simple.
But, hey, if you don’t directly trade commodities or don’t want to deal with the volatility of natural gas futures, don't worry! We like natural gas stocks, too.
Here’s a chart of the First Trust Natural Gas ETF $FCG:
FCG is putting in a potential scoop-and-score or bull hook. We’re seeing this pattern everywhere as stocks and commodities reclaim key levels. This has been especially true for energy and materials stocks!
For FCG, that critical level is marked by its former 2016 highs near 28. We like it long if and only if it’s above that level with an initial target of 48 and a secondary objective of 120.
To be clear, similar to the pivot highs for natural gas futures, we can only be long above those 2016 highs in FCG. If it’s below there, leave it for the birds.
It’s pretty straightforward...
Natural gas looks ready to go. And, unlike last month, energy stocks do too!
Stay tuned as we update you on the changing market environment and how to play it.
COT Heatmap Highlights
- Commercial hedgers continued to reduce their long exposure to crude oil by more than 20,000 contracts last week.
- Commercials like cocoa. They're less than 5% away from their largest long position in three years.
- Commercials continue to hover near three-year net long extremes in lumber.
- And commercials are getting long silver and platinum, as both are within 10% of three-year net-long extremes.
Click here to download the All Star Charts COT Heatmap.
