The latest Commitment of Traders data, from the CFTC, shows that a relative extreme net short position among large speculators in natural gas may be unwinding.
You see, speculators build up their positioning in accordance with the prevailing trend. But once their positioning reaches an extreme, they tend to be wrong about the direction of prices.
As the price of natural gas fell through May, June and July, speculators started shorting natural gas futures. Prices bounced back in August as traders’ net short position became large. And now, after a pullback in September, the extreme net short positioning is showing signs of unwinding. To me, this suggests the price of natural gas is set to rally again.
You can see the extreme short positioning on the following chart — December 2012 and September 2013, respectively.
And below is a weekly chart of natural gas futures. I’ve pinpointed the previous two occasions where extreme positioning was unwound. In each occasion, the price of natural gas rallied big-time:
Now, futures positioning extremes are not a precise trading tool. But in conjunction with other proven indicators, I’ve found they are very helpful in timing trades.
And that’s why I recommend being long natural gas.
Written By JR Crooks From Money And Markets
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