Oftentimes when the natural gas futures contract moves in adirection that fundamentals do not necessarily dictate, commercialtraders are left shaking their heads and cursing those speculators”who know nothing about how the physical market works.” But as thepanelists at yesterday’s GasMart Power’98 session titled StirringUp the Natural Gas Futures Market with Locals & Funds stressed,speculative funds are here to stay, so perhaps commercials would bewell served to learn how they think.

Tom Saal, Vice-President of Pioneer Futures, Inc. of Miami, FL,began that education process by explaining the value of theCommodity and Futures Trading Commission’s Commitment of Traders(COT) Report. Saal likened the COT report to a baseball program, inthat it gives necessary data in order to evaluate one’scompetition. “From the (COT) chart I can make a pretty goodinference about the trading styles of commercials. It seems likewhen the market is moving higher, commercials are getting shorter.Why do they do that? Because their perception of value on the sellside is a little bit higher than the market is. So they put a sellorder in when the market is going up and vice-versa. That’s knownas a responsive trader,” he said. Because of that, he noted, onepotential trading rule may be to see what commercials do and simplydo the opposite.

Or perhaps one could simply follow the path of speculators, whomSaal feels have “a much better batting average. As the market isgoing lower, they’re selling. As the market is going higher,they’re buying. They’re not waiting for the market to go up totheir perception of value which is way above the market in theperspective of producers. They’re looking at the market right nowand saying ‘you know what? I want to get aboard this train. Theyare what we call aggressive or initiating traders. Their battingaverage looks pretty good.”

Saal went on to say Dec. 6, 1995 was a major day for gas futurestrading. It was the day the Commodity Research Bureau changed itsindex of inflation by adding natural gas. “That brought in a newelement of the market, the people who hedge against inflation. Itbrought a new type of trader into natural gas, and these people areeither a little long, or a lot long. They haven’t been very netshort very often. When they do get very net short or very net long,something’s going to happen.” That is, speculators who are greatlynet long will at some point have to cover their positions, so whenspeculators reach historically high levels of open interest, “thatshould be a warning signal,” Saal said.

Susannah Hardesty, President of Energy Research & Trading ofGreencastle, IN, expanded on the COT report, saying that by itselfthe report does not do justice to the true influence ofspeculators. “Many funds trade on intraday systems, and some tradeon as many as five minute intervals. But they are day traders, sotheir activity is not reported in the Commitment of Traders Report.I’ve talked to one fund manager who will take losses on 19 of 20trades in order to be there for that 20th trade, when the marketbreaks in their direction.”

She noted many fund managers do their research and implementtheir trading systems on super computers, which is something thatpeople simply cannot track on office PC software. Moreover, shesaid commercial traders simply do not have the time and are not inthe business of putting in seven to 10 trades per day. Still,commercials should still be aware of what these funds are doing,and to this end, she suggested methods that traders can use tomimic chaos theory and swing trading, which Hardesty labeled as”the two new, major aggressive fund trading systems.”

“The chaos theory is really very simple,” Hardesty said. “Itsays everything follows the path of least resistance. The theorylets new information come in, organize itself and do whatever itwants to do. Traders are ready to respond to this new info as soonas it comes in rather than to try to determine some historicalpattern showing which way prices are likely to go.

“Chaos theory people think that the structure in the marketplacechanges because the attitude of traders changes. Once the attitudeof traders changes, the volume changes, which produces a change inmomentum and in turn a change in direction.”

While Hardesty called chaos traders “the undercurrent in themarket when its going sideways,” she labeled swing traders as thosewho look to trade breakouts of these trendless ranges. She notedsuch traders often look to the average directional indicator (ADX)for guidance. Swing traders often put in orders when the ADXindictor drops below 15, she said.

Hardesty also attempted to answer the question, when dospeculators start getting out of their positions? “From myobservation, speculative funds tend to reduce their positionsfollowing a 10% retracement from a major high on the daily close.”

Hardesty concluded her remarks by issuing the following warningto buyers: based on the activity of speculators and on seasonalfactors, she predicted futures may reach the $3.80-$5 area sometime between Nov. 23 and Dec. 18 of this year. “If you’re a naturalgas buyer, prices right now look pretty good,” she concluded.

Finally, Sandy Trot, President of Trot Trading Corp., spoke onwhat it’s like to trade gas futures as a local. “People always askme, why am I always bullish on the market? Well, when I came tonatural (gas), the market was $1.09. The market went straight from$1.09 to $2.81. You don’t quite catch these kind of moves in crudeoil. I’ve never seen a market trade as easily or trend so well asthis market.” He did say, however, locals in general tend to bebearish, because the market “can fall about three times as fast asit rises.”

One bit of advice Trot imparted to the audience is that “40- to50-day moving averages are very, very key with funds. If nothingelse, you should watch those. A settle above the average usuallyleads to buying, while a settle below usually leads to selling.”

Trot agreed with Saal that commercials tend to have the worstbatting average when it comes to trading gas futures, and heoffered them the following advice. “You need a good technicaltrading system, and if you find something that works for youtechnically and you have good discipline, you’ll make money in thismarket. The key, however, is discipline.”

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