#$ugaz

Potential price resistance is among several obstacles posing a challenge to the recent rally in Nat Gas.

**Edited on 10/21/16 to update the Nat Gas futures COT chart**

As equity managers, we mostly talk about the equity market. And for the past 8 months, much of that talk has centered around the post-February stock market rally. However, stocks aren’t the only thing that have bounced sharply since early in the year. Many commodities have also rallied, including natural gas. In fact, nat gas has more than doubled since bottoming at the beginning of March (we do not trade futures so that performance is measured by the S&P GSCI Natural Gas Index which closely tracks the commodity -- unlike the ETP’s [e.g., UNG] that have obvious tracking issues).

That said, there are a few factors that may present a challenge currently to the rally in natural gas. Not the least of which is price. Specifically, the GSCI Nat Gas Index is bumping up against the Down trendline stemming from its 2008 top and connecting the early and late 2014 tops.

This trendline may present a hurdle for the current extension of the nat gas rally. That is not the only challenge potentially facing it, however. One other red flag comes in the form of positioning in the natural gas futures market. Specifically, according to the CFTC, Commercial Hedgers recently adopted a net short position for just the 2nd time in the past 9 years. The concern is that these Hedgers most often represent the “smart money” once positioning gets to an extreme. Thus, this rare net short position indicates a potential headwind for nat gas prices, at least based on historical behavior.

Early 2014 was the only other time Hedgers went net short in the last 9 years. Nat gas prices peaked immediately and commenced their 2-year ~70% decline. Additionally, other times since 2007 that saw the Hedgers approach a net short position coincided with at least short-term tops, including October 2012, April 2013 and the major, long-term top in 2008.

**10/21/16 Edit: As of the current week’s data (a/o Tuesday, October 18), Commercial Hedgers had moved to a net short position of -18,454 contracts, their largest net short in over 9 years. See updated chart below.**

At least one other red flag for the nat gas rally comes in the way of seasonality. Now, seasonality represents overall historical tendencies and, thus, should not be taken as gospel. However, according to www.sentimentrader.com, on average, by far the best 2 months of the year for natural gas prices are September and October. After that, they tend to peak and the subsequent 4 months have negative average returns, historically.

The rally in natural gas this year has been impressive, including a 20% pop to 2-year highs in just the past 2 weeks. Thus, the bulls are firmly in control. However, at least a trio of obstacles in the form of long-term trendline resistance, futures positioning and seasonality could potentially conspire to extinguish this current leg of this nat gas rally.

________

More from Dana Lyons, JLFMI and My401kPro.

In the last week of February, a historical event took place here in the U.S. when a tanker left the coast of Louisiana carrying America’s first liquefied natural gas (LNG) export to Brazil. Symbolically, the tanker marked a new era of energy production and trade and was a sign of the U.S.’s new position as an independent player in the Energy Sector.  

In many ways, this milestone was made possible by the decade-old shale boom that was pioneered and propelled by the energy visionary, Mr. Aubrey McClendon. Mr. McClendon died on March 2nd in a one-man car crash in Oklahoma City at 56 years old.

McClendon was undoubtedly a pioneer in the U.S. energy industry and a brash risk-taker. After graduating from Duke University in 1981, Mr. McClendon co-founded Chesapeake along with his friend Tom Ward. Beginning with just $50,000 and 10 employees in 1989, he transformed Chesapeake Energy Corp. into one of the world's biggest natural gas producers.

Mr. McClendon’s vision of gas replacing coal for power generation and oil for transport remained steadfast throughout his career. As a visionary, he was able to see the vast untapped potential of the shale industry long before many others, which helped wean the country from its reliance on foreign oil. He took action to mobilize agents across the country to sign up drilling leases on the most promising areas for shale development and swiftly built the largest acreage position in the U.S.

He was not the first person to combine the techniques of horizontal drilling and hydraulic fracturing to extract gas from previously unyielding shale rocks, but he was a chief leader in pushing the fracking revolution forward to utilize the new sources of natural gas and change the face of American energy.

Mr. McClendon might be remembered by many epitaphs (some of them negative) but his bold vision of the future of energy helped him play an important role in America’s energy renaissance. A decade ago, America was expected to become an importer of LNG, but the shale gas revolution in the U.S. unlocked cheap, abundant gas supplies enabling the country to become an exporter instead.

While McClendon’s career was not free of disagreements and accusations, McClendon was a bold leader who helped reset the approach to energy in this country.

FREE Download – Zacks Economic Outlook: April, 2016

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

Our long natural gas trade from late February to late April boasts a 72.0% success rate gaining 18 out of the last 25 years. One of the factors for this seasonal price gain is consumption driven by demand for heating homes and businesses in the northern cold weather areas in the United States. In particular, when December and January are colder than normal, we tend to see depletions in inventories through February. This has a tendency to cause price spikes lasting through mid-April and beyond (shaded in yellow in next chart). However, just the opposite of this has happened this winter and natural gas price is trading at an almost unbelievable $1.673 per one million British Thermal Units (Btu). This is its lowest price it has traded going back over 17 years to at least 1999.

Our best trade scenario using the July natural gas contract has a holding period of approximately 41 trading days beginning on or about the 16th trading day of February and lasts until about April 23. Ample supply and stagnant demand in recent years has caused this window to move around and/or compress but there have been tradable late-winter or early spring rallies that have been profitable.

Three years ago yesterday, Natural Gas looked to be forming a very bullish pattern. An inverse bullish head & shoulders pattern appeared to be in play, with few investors bullish. The chart below was published on 6/14/2012 (See post here)

What followed? An 89% gain in the next 10-months! 

CLICK HERE TO ENLARGE CHART ABOVE

Now Natural Gas could be forming a similar pattern to what it did three years ago, right before it blasted off! 

CLICK HERE TO ENLARGE CHART ABOVE

Three years ago, right before Natural Gas blasted off, bulls were hard to find. The same applies today, as bullish sentiment on Nat Gas stands at 21%.

The odds may be low that Natural Gas repeats what it did three years ago, should it break above falling resistance line (1), yet buyers could well come forward or shorts could be forced to cover, like they were three years ago if a breakout above (1) happens.

 At this time traders own a similar amount of shorts at they did in June of 2012!