We published, "Picking a Bottom in Natural Gas" on January 15th. The recent decoupling of the declining energy sector from the broader stock market is nurturing the seeds of future growth in the economy as a whole. This is providing early buyers in natural gas futures with some hope that as the energy and stock markets have decoupled so too will natural gas from the broader energy sector.
A month ago, we discussed the growth in the commercial long hedgers' net position and suggested that we'd continue to pay attention as its neared a record high of +229,000 contracts set in 2011. Here's the updated chart which shows that continued commercial buying is pushing us closer and closer to record territory. Commercial trader buying in the last two weeks has increased their net long position by 8.3% to 213,457 contracts.
Furthermore, the recent market weakness pushed our proprietary short-term market momentum indicator into oversold territory. The market's short-term oversold nature combined with positive commercial trader momentum is exactly what we look for in a long trade setup. Tuesday's rally brought the short-term momentum indicator back above the oversold threshold. This triggered the alert we sent Tuesday night to our subscribers. Tuesday's rally also generated the swing low for the move of $2.57 mm/btu. We'll use this as our protective stop placement point. You can see the full setup with the current year's trades on the chart below.
Tuesday's rally created quite a stir. Volume jumped by more than 35% while open interest changed very little. Given the current distribution of market participation, I'd say it looks a lot like commercial long hedger buying combined with short covering among the large and small speculators. Wednesday's move should cause open interest to begin declining as short positions carrying trailing stops begin to get hit. We'll clearly know more after this week's CFTC Commitment of Traders report.
Finally, we'll return to the broader seasonal analysis provided by Moore Research with our own emphasis highlighted for the current period.
The previous factors were all outlined a month ago in our closing statement.
"We see natural gas being dragged lower in the short-term by overall weakness in the stock market and the commodity sector with a special emphasis on energies. The technical damage that has been done to this market does not match the fundamental picture that the commercial long hedgers are trying to show us. This could very well be a classic case of program traders following black boxes versus the collective wisdom of the commercial traders’ boots on the ground view of things. We believe that the odds of a successful trade returning a good percentage are increasingly on the long side through the next several weeks. Therefore, we’ll be actively looking for the bottom and publishing the corroborating evidence as it materializes."
This is the updated bottoming process for which we've been waiting.
