Several of the Profs and I have touched on Natural Gas over the past couple of months, generally agreeing that a bottom of import was likely not imminent.
I'm starting to see some of the signs I wanted to around this time of year in the commodity, though. We're finally getting initial signs that downward momentum is slowing, and there are now positive divergences on the daily chart.
Not least among the reasons for stalking a long trade is the seasonal factor coming into play. I've written about this tendency before with Nat Gas, and it is very strong.
The chart below shows what happened for each year since 1991 if we had bought Nat Gas on the 35th trading day of the year and held for two months.
The average return (the thick black line) was quite robust, giving a return of +13.5% by two months later. Most notable to me is the drawdown – it was very limited in most cases. We rarely saw the commodity trade more than 5% below the entry price at any time during the two months.
The two (very large) exceptions were 1994 and 2003. In 2003, the recurring bubble in the commodity was late in arriving, as it peaked in February instead of the more typical late fall time frame. We would have enjoyed the run for a few days, then it would have begun to hurt. In 1994, the bubble was also late in arriving (Nat Gas peaked in early February), and again it lead to losses on this seasonal trade.
So far, the commodity has been acting fairly in line with its historical tendencies. Given the positive seasonality it has shown this time of year and going forward for the next two months, and the positive momentum divergences we're beginning to see (it's also sitting right on the 61.8% retracement from the 2002 low to the 2005 high using the continuous contract, and has registered a DeMark exhaustion buy signal that has gone 11/15 over the past 15 years), I like the risk/reward here. If we see it drop much below $6.90, though, I'd be worried this is going to be a loser.
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