In 2015, Natural Gas has been a frustrating market to trade for the both the bulls and the bears, as it has remained in a range between $2.50 and $3.00 for most of the year. I don’t know what direction this range is going to resolve in, but as I’ll explain below, the weight of evidence suggests that it’s appropriate to approach this market from the long side in the coming months.
The first thing I want to point to is seasonality. Data compiled over the last thirty years suggests that we are currently entering the strongest two months of the year for Natural Gas prices, with gains averaging 13% and 8.8% respectively. The second thing that catches my attention is the net long positioning of commercial hedgers, which is currently hovering around all-time highs, as it has been since late last year. Lastly, although public sentiment has come off of its lowest levels of the year and is peaking its head into neutral territory, pessimism is still quite abundant relative to what we’ve seen throughout history.
Overall, I’d say the backdrop we’re currently provided by sentiment and seasonality suggests that we look at this market from the long side, but let’s see what clues price action is giving us.
The weekly chart is showing us that prices are clearly in a structural downtrend, as shown by the series of lower highs and lower lows, as well as a downward sloping 200 week moving average. More recently, prices have found some support around the $2.60 area and has been carving out a base above that level for most of the year. Despite momentum diverging positively for most of the year, we’re beginning to see it slowly lose grip of this trend line support, which isn’t great. For the time being, we remain rangebound between $2.55 and $2.95, with some overhead resistance near $3.10 which represents support from 2012 and 2013.
From a more tactical perspective we can see the range we’ve carved out year to date, which almost looks like a rounding bottom. One concern I have is that momentum remains in a bearish range on this timeframe, not hitting overbought conditions on any of its recent rallies. The biggest issue I see with this chart, and why I think we’ve not seen rallies gain any sort of upside momentum, is the presence of a downward sloping 200 day moving average. Until this moving average begins flattening and starts to rise, I think it will continue to be a major headwind for prices. For the time being we remain rangebound with neither side showing much momentum or follow through. If prices can continue to consolidate to allow 200 day to flatten out, I think we have a good shot at breaking above trendline resistance and the overhead supply near $2.95 in the coming months, especially with the tailwinds of seasonality and sentiment support the bulls.
The Bottom Line: Natural gas has been stuck in a trading range all year, and will likely continue to be until we get a decisive break above $2.95 or below $2.60. Bulls want to see this market continue to base, allowing the 200 day to flatten out, followed by a breakout above this downtrend line and resistance at $2.95 with momentum hitting overbought conditions. Bears want to see prices to ignore the seasonal strength normally associated with September and October, paired with a break of $2.60 to the downside and momentum hitting oversold conditions.
Given the bullish backdrop that seasonality/sentiment are providing for the months ahead, I would prefer to approach this market from the long side once the conditions mentioned above are satisfied. In the event that prices break to the upside, I’d likely have a price target up near $3.40/$3.60 on the long side and a downside target of the 2012 lows if prices break lower.
As always, if you have any questions feel free to reach out and I’ll get back to you as soon as I can.