December Natural Gas is up 4.3 cents at $5.105 this morning as I write. The enclosed chart shows that in the spirit of Halloween, this market has been truly scary lately. Just eight trading days ago, natural gas was breaking out to the upside over the highs of the last three months. Then only the next day, natural gas completely reversed and dropped sharply for five out of six days to break to new monthly lows. Somebody out there certainly got hurt in that debacle. There are a few reasons why prices of natural gas rallies as far as they did. Namely, coal prices had risen to price levels where it made sense for power plants etc. to switch to natural gas. Secondly, prices had recently seen historically low price levels and finally the continual rally in stocks is giving hope that industrial demand will soon pick up, along with the beginning of winter cold temperatures right around the corner. The problem with all of this is the fact that natural gas prices could get to price levels very quickly to force the utilities to switch back to coal, the stock market is now is some sort of correction so industrial demand may not be ready to boom just yet, and winter time hasn’t arrive yet, and also, some weather forecasters are now predicting a warmer than normal winter season. The only reality for natural gas that we do know is that inventory levels are at their highest in history right now. So, it is no surprise that natural gas prices go a little ahead of themselves recently, an no surprise that prices have fallen back sharply. I would expect natural gas prices to begin stabilizing and evolving into a wide trading range as winter begins. We are going to need some cold temperatures this winter to reduce the excess supplies, or else we will enter Spring time with too much inventory right when the producers being building supplies once again.
The directional movement indicators are bearish and the ADX line is meandering sideways to higher. Many of my other indicators suggest that natural gas is still building a major long term bottom. With that in mind, I don’t recommend anything new in natural gas for now, aside from our attempt to buy December 2012 contracts, and to hold on to our existing positions.
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 24 days. I also continue to recommend buying the December 2012 Natural Gas at $7.25 GTC.
Oct. 30, 2009
David Hall
