A developing opportunity in natural gas

By Ben Turney

It’s been a while since I wrote a piece using the MIDAS Method, but there is a developing opportunity in the natural gas market which is starting to look quite enticing. Below is the three year MIDAS chart for natural gas:-

As you will note, MIDAS primary support is 16 months old, the bull run starting on April 20^th 2012. Since April 20th 2012, the spot price for natural gas has been on a fairly strong run. It doubled within a year, pulled back, and then went on to make new highs.

Now, the price has pulled back again and has settled at $3.2per MCF in the last few days. That the drop halted at MIDAS primary support looks highly significant. MIDAS primary support often provides some of the best trading opportunities. As long as the primary trend remains intact, MIDAS allows traders to make relatively low risk trades, taking full advantage of mean reversion while seeking out key price reversals.

Natural gas is currently at just such a point. The trend has clearly been up and it seems highly unlikely that this has been broken. The natural gas market is particularly sensitive to seasonal conditions and the recent drop in price has largely been attributed to a cooler American summer, with less demand for energy sapping air conditioning. Inventories have risen and the expectation is they could rise further before August is out.

However, take a look at the latest EIA weekly report on natural gas and it quickly becomes clear that while inventories have risen, they are still below where they were 12 months ago. Fundamentally this could be seen as a fairly bullish indicator.

Moving our attention back to the technical’s, the MIDAS chart above provides further clues as to where we are at – approaching the time to buy in my opinion. First, the APR2012 primary support was briefly breached in June 2012, only for the price to recover extremely quickly. Such an early breach and recovery usually acts as fairly strong validation of a support line. This matters when these support lines are later retested. Further validation came over the next 12 months as APR2012 support was tested only once more and the price moved steadily away from it. In simple terms, the price reacted and then behaved very healthily, which generally bodes well for future trades.

This said, the current test of APR2012 primary support is a crucial one. Even if the price falls a bit further from here, as long as it recovers quickly then both the support line and the bull market remain intact.

There are two possible ways to play this. First, the more risk-inclined could take the current price and open a position immediately. Alternatively, the more cautious might decide to wait. If temperatures remain generally cooler it is entirely reasonable to expect a further increase in stockpiles. This should obviously put pressure on the price. However as the summer comes to an end, seasonal buying should start again, as customers prepare for winter. Any excess supply could quickly be consumed and the price would resume its ascent. Under this scenario, the time to buy would be when the price crosses through APR2012 support and the market is rising.

Either approach is valid, but I am planning on opening a small position now to see how the market behaves over the next few weeks. If this plan works well and I get a decent opportunity to add to my long then I will take it.