Despite the recent pullback on Tuesday, July 31, I’m bullish September natural gas futures both fundamentally and technically. Monday’s gains in natural gas futures were given back on Tuesday as an Atlantic storm was spotted near Central America, possibly threatening the U.S. Gulf of Mexico, which is responsible for about 14 percent of the nation’s gas production.
However, the unnamed tropical storm system is predicted by some weather models to avoid the U.S. Gulf of Mexico. In early trading Wednesday, August 1, some of Tuesday’s losses were erased, as NYMEX September natural gas futures rose in the early morning to peak near $6.47 MMBtu.
On the technical side, you can see in the chart below that both the Moving Average convergence/divergence (MACD) and the slow stochastics have crossed into buys.
I’m expecting about a 60 percent retracement of the recent downtrend to about the $7.50 level. The market is currently oversold, and we may start to see traders covering their short positions and possibly going long at these levels. Short covering and strength in the crude oil market helped natural gas stay firm last week, after falling to the lowest price level since December 2006.
The Commodity Futures Trading Commission’s July 24 Commitments of Traders (COT) report showed funds a record net short position, so this market can easily make a major correction higher if we start seeing more short covering. And with the most active part of the hurricane season approaching, I think we should see a lot of short covering as traders may try to take a more conservative position. I believe that the market has so many short positions that even a minor weather scare can potentially set off a major short covering move.
If you are looking for a defined risk strategy in this market, consider buying the September $7.00 / $7.50 call spread, currently at 13 cents, or $1,300 per spread excluding commission costs. I see this spread as having the potential to be worth $5,000 at expiration (27 days) if September natural gas is at $7.50 or higher. With this strategy, your risk is defined to what you paid for the spread, plus any commission or fees. The way this spread works is you go long the $7.00 call and sell the $7.50 call to help pay for the $7.00 call. This limits your potential but also makes the $7.00 call a lot less expensive.
For more aggressive traders, I recommend going long the September natural gas futures at $6.40. I would look to exit the position at $7.22, which would represent a potential profit of 82 cents, or $8,200 per contract excluding commissions. I would put a protective stop at $6.23. Every penny in natural gas is $100 per contract; therefore a fall from $6.40 to $6.23 would equal a loss of $1,700 per contract, excluding commissions.
Call me for more specifics on trading strategies to suit your particular risk tolerance, and, ask about a special promotion to get 50 percent off commissions for your first 30 days with a new account.
Frank D. Cholly is a Senior Market Strategist with Lind Plus. He can be reached at 888-801-9302 or via email at fdcholly@lind-waldock.com.
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