Natural Gas Is Setting Up To Rally Again

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September 30, 2013 3:02pm NYSE:UNG NYSE:UNL

natural gas

JR Crooks: I like to look at futures positioning. I don’t track every jot and tittle, but I’ve found identifying positioning extremes can be a helpful trading indicator.

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.

Click for larger version

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:

Click for larger version

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.

jr-crooksWritten By JR Crooks From Money And Markets

Money and Markets is a free daily investment newsletter published by Weiss Research, Inc. This publication does not provide individual, customized investment or trading advice. All information is based upon data whose accuracy is deemed reliable, but not guaranteed. Performance returns cited are derived from our best estimates, but hypothetical as we do not track actual prices of customer purchases and sales. We cannot guarantee the accuracy of third party advertisements or sponsors, and these ads do not necessarily express the viewpoints of Money and Markets or its editors.

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