December Natural Gas is down 27.5 cents at $5.209 this morning as I write. The enclosed chart shows that December Natural Gas has completely broken down below the consolidation trend line and the price lows over the past month. This does not bode well for the trend. The directional movement indicators have crossed to the bear side but the ADX line is still just meandering at a low level. An assortment of different indicators are mostly bearish, but a few are still neutral to bullish.

Followers of this letter should be long one December Natural Gas from $5.721 and short one December Natural Gas ($5.50 strike) call option from 60 cents, and long one December Natural Gas ($5.30 strike) put option from 40.2 cents and short one December Natural Gas ($4.80 strike) put option from 19.2 cents. Option expiration is in 28 days. I also continue to recommend buying the December 2012 Natural Gas at $7.25 GTC.

Since my covered call write trade has good protection down towards the $4.80 area, and all my indicators are not lining up on the bearish side, I will hold on to this trade for now. If prices fall to the area of $4.80 well before expiration in 28 days then I may have to liquidate the position. In the mean time, every day that time goes by, our trade is helped a little bit. I am looking for that 60 cent option premium that we took in for the $5.50 call to erode further, thus helping our overall trade.

Oct. 26, 2009
David Hall