Natural Gas (NYMEX)

I was persuaded by discussion in the chat room yesterday to give Natural Gas futures more coverage, since a contract margined for about $800 would seem to offer a pretty good bang for the buck.  That said, we shouldn't have any illusions about catching a major trend, since this vehicle has been chopping and thrashing within an 80-cent range for more than a year.  That won't prevent our jumping on promising trades via camouflage and trading both sides of the market, however.  For now, that implies zooming down to the five-minute chart, where 'external' peaks nicely suited to our purpose have begun to take shape. The one I have in mind lies at 3.258, and any b-c pullback from just above it could yield the kind of very low-risk entry opportunity we thrive on.  I've sketched it out hypothetically for the benefit of night owls, since this trade has a chance of triggering in the wee hours. _______ UPDATE (10:47 a.m. EST):  The first camo 'buy' signal occurred at 3.264 at around 5:20 a.m. EST. On the 5-minute chart, the coordinates are as follows: A=3.252 (4:40 a.m.): B=3.265 (5:05 a.m.); C=3.260.  You'll notice that point 'C' low blends traits of the 'atrocity' low with what could initially have been mistaken for a fine single bar.  This set-up was good enough for government work, for sure. More seriously, and putting the pattern's point C flaw aside, you will rarely go wrong buying impulsive rallies that are this subtle, especially if you do so early in the life of the new trend.  I am not establishing tracking guidance, however, because of the silly time of day the opportunity occurred, and because of the somewhat dubious provenance of point 'C'.  I've refreshed the chart to show how the set-up developed.

A classic pattern on the daily March natural gas futures chart gives us a target at 3.178 which offers good odds to bottom-fishers.  The pattern began with an 'A' point of 4.036 on November 22 of last year, a day when someone was obviously trading futures instead of eating turkey or remembering John F. Kennedy.  The sharp decline of almost 25% kept to its holiday theme by bottoming on New Year's Day, again during electronic trading.  A vigorous bounce followed by another decline has moved the futures toward our midpoint pivot, which ought to be given a good ten or more ticks of leeway with a sell-stop, in light of the large size of the pattern.  If the market goes very far below the pivot, our method tells us to expect a drop to 2.710, a level that the March contract has never seen.  (Posted by Doug “harry” McLagan)

The futures have just tripped their third buy-signal in a year on the daily chart, and even though this may prove to have been a false alert, there is probably money to be made trading from the long side. The actual signal came at the 3.3673 point 'X' shown, so camouflageurs should focus on buy-side opportunities here. My hunch is that the move will get to p=3.503, at least, without stopping out those who have boarded thus far -- a 'successful' trade by our definition. (A 'winner' is a camo trade that gets to 'D' or higher.)

We hold a single-contract tracking position whose cost basis has been reduced to 2.121 by theoretical gains from three contracts exited earlier. For now, maintain a stop-loss at 2.458. _______ UPDATE (3:37 p.m. EST): Lower the stop-loss to 2.390. The original one references a prior low at 2.459 recorded on January 23, but this support may be too obvious by now to use.  Our new stop-loss will still give us a nice paper profit if it's hit, but it is less susceptible to being "run". _____ UPDATE (Feb 1): We used the 2.390 stop-loss to exit the remainder of the position for a theoretical profit of $2700 per contract (based on an initial position of four contracts). The nascent bull is not necessarily dead, but in any case we can continue to look for a fresh entry opportunity, as discussed in today's commentary.

I'm establishing a tracking position in March Natural Gas, since I've heard from a subscriber who got long last week at 2.305, the Hidden Pivot target that I first identified here around Thanksgiving as a potentially important low.  The actual low occurred at 2.289, or 1.6 cents beneath the pivot, so 2 cents is the tightest stop-loss you could have used that would have survived. Assuming four contracts bought and risk:reward held constant at 1:3, that implies an initial partial profit-taking interval on two contracts six cents above the entry price, at 2.365; and on a third, at 2.425. That leaves us with, in theory, a single contract whose cost basis adjusted by paper profits reckoned so far is 2.121.  For now, use a stop-loss at 2.458, which is where the hourly chart would turn bearish via the creation of a downtrending impulse leg. We'll be swinging for the fences on this one, so I'll offer no exit target for the time being.  Odds that we actually caught the bear-market low within two cents would shorten once this vehicle has created a bullish impulse leg on the daily chart. From current levels, that would imply a thrust exceeding the 3.006 peak made on January 4.  A penny is worth $100 in this vehicle, so our paper gain so far amounts to about $4,000.

A worst-case target of 2.305 first appeared here around Thanksgiving, but we should be prepared nonetheless for a bullish turn from somewhere above it, since the death rattle could be ferocious -- and potentially very profitable to trade.  I would suggest setting a screen alert at 2.832, since that's where the 10-minute chart would turn impulsively bullish for the first time in ages.  A B-C pullback from somewhere just above it could provide a low-risk 'camo' opportunity to grab a tiger by the tail.  If the sketched -out trade fills, let me know in the chat room and I'll establish a tracking position for your further guidance. _______ UPDATE (January 16): The futures were barely able to muster a dead-cat bounce on that last effort.  Even so, the 2.305 will remain a good place to try bottom-fishing aggressively with our habitual penny-ante stop-loss.  _______ FURTHER UPDATE (January 23): The futures have taken a hysterical, short-squeezey, Wait-Until-Dark lunge this morning that is too insane for us to seek camouflage. The fact that it has come from more than a  penny below my 2.305 target is not exactly bullish, but we'll give the move the benefit of the serious doubt nonetheless as the possible liftoff from a bear-market low. Supplies of natural gas are said to be in multiyear excess, but that could change more quickly than most "experts" imagine simply because heating oil is getting too expensive for the American middle class.

Two bearish patterns that have been weighing on this vehicle are so clear that lower prices seem likely. My worst case target is 2.305, well beneath the so-far multiyear low at 3.470 that was recorded a week ago and 35% below current levels. It is the 'D' Hidden Pivot target of the pattern shown, and with a sibling midpoint at 3.790, a rally to that number should be viewed as a shorting opportunity, provided "camouflage" is used. If a dead-cat bounce should exceed the midpoint, however, the next would be at 4.422, my maximum upside projection for any bear rally and a potential back-up-the-truck number for shorts.  Note:  I will switch to coverage of the January contract henceforth, but please use 2.210 as its bear-market target.  That number is equivalent to the March target at 2.305 and has 3.783 as a midpoint sibling.