A maxim in futures trading reads that “there is always a big enough paddle in this business for everyone” and today’s surging futures prices show how easily adverse moves can impact the most senior traders.

After recommending short positions last week, one of the leading analysts of the natural gas market is warily watching today’s bull run and considering if and when to exit his position.

“I’m surprised that natural gas has held up as well as it did, given how much crude oil got whacked. It’s the time of year that by nature the withdrawals are going to get a lot bigger, and those are certainly priced into the market now,” says Bill O’Grady, senior analyst with AG Edwards, St. Louis.

“I don’t know if the market has priced in some outside, war-related spike in crude oil prices, but I’m of the opinion that if the [National Weather Service] is even close to being right on the weather, the rest of the winter could be very mild, and natural gas prices could take a tumble. We are short January futures from $4.45, $4.35 and $4.17, so we are loaded for bear right now,” O’Grady said.

“It is a risky trade when you are watching football players throw into a snowstorm. December and January are when gas is most vulnerable, and even inventories are coming down — though they are still relatively high. They are lower than last year, but at that time there were injections through November. If there had been a normal winter last year, that gas would have been needed,” he noted.

“There will eventually be a strong bull market, it just won’t be within the next few months. I also don’t expect prices to fall much below $3.50. If it does, it is a buy.”

Astute traders such as O’Grady always have a scenario or framework in mind in which to change their outlook. “To change the short term to a bullish outlook would require a huge change in weather or $45 to $50 crude. Either one will work.

“We are using stop loss orders at $4.65. I generally place stops a little bit above or in the neighborhood of old closing highs. Technically if the pattern develops, there will be a head and shoulders formation, and the neckline is fairly low, $3.80. This time of year it just looked to me like $4.35 to $4.45 was where this market was going to run into trouble. If prices get below $4.00, I’ll be shedding positions and tightening things up.

“I don’t think there is much in the way of industrial demand to disturb natural gas prices,” O’Grady said. “This market is resting on related geopolitical events from crude oil, and leaning very heavily on weather, and there has been great weather for natural gas bulls. Also it’s not unusual in El Nino years to have a cold start. There are hints that the current ridge is going to break down.”

Traders using sophisticated trading models also see prices working lower. “The move from last Monday is highly discontinuous, and from the standpoint of the pattern recognition trading programs that we use, Tuesday was the first sign that a trade in the opposite direction (sell) might be warranted,” said an analyst with a leading California trading and marketing company.

The 29 cent jump last Monday, per se, did not indicate a sell. “The pattern takes time to develop,” he noted on Wednesday. “I’m surprised that the move didn’t go higher, because when there is a big jump like that, there is usually follow-through for eight to 13 days. For that kind of move, prices petered out quicker than expected.

“From that standpoint I would not be surprised to see an exhaustive rally for the first part of [this] week. Most of our systems are starting to kick in from the ‘sell’ side, and I would expect to be gradually selling.”

According to the analyst on the one hand the market patterns are suggesting that there is still another ‘shoe to fall’, but the fact that it hasn’t happened yet indicates that it might not fall at all.

“In some regard, the programs we use will be selling now, but save some bullets for a subsequent price rise higher. We’re scaling in our sales. The current patterns suggest a very successful trade. Prices should fall below $3.71.

“It’s hard to believe, but that is what the models are pointing to. We are cautious sellers.”

(Republished with permission from Bill Burson, https://gastrader.net )

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