The “Widow Maker” Trade Is Setting Up

The widow-maker is setting up for another run.

On Wall Street, natural gas is known as the “widow maker” trade. That’s because the price action is so erratic. It doesn’t seem to conform to any rules of fundamental or technical analysis, so trading natural gas often feels like fending off death.

Indeed, anyone who owned natural gas over the past six weeks knows the feeling. The price of natural gas peaked in early March at about $4.50 per mcf. Today it trades for $3.00.

That’s a 33% decline in just over six weeks.

This decline has created an extremely oversold condition in natural gas – while the seasonal tendency for it is to rally.

You see, for whatever reason natural gas often rallies during the month of April. For eight out of the past 10 years natural gas finished April higher than where it started the month – with an average gain of 4.4%.

But, that’s not going to happen this year.

Remember, this is the widow maker. It’s tough to trade. And so far, anyone betting on an April rally in natural gas is getting buried on the trade.

But, it looks to me like we might get a rally in May.

Look at this chart…

Natural gas is trading nearly 30% below its 50-day moving average line. That’s an extreme move. The proverbial rubber band is quite stretched below the line.

While extreme conditions can get even more extreme, this condition sets the stage for a “snap-back” rally.

We didn’t have a good risk/reward setup for buying natural gas last month, despite its strong seasonal tendency to rally in April. The price was too close to its 50-day moving average.

The rubber band wasn’t stretched in either direction. So, it was a 50/50 proposition to bet on a direction.

That’s a poor risk/reward setup.

Now though, with natural gas in an oversold condition, there’s plenty of room for the widow maker to rally if it turns out the seasonal bullishness was just delayed by a few weeks.

A move back up to the 50-day MA would yield a 30% gain. A rally back up to where it was trading last month would be 50%.

Meanwhile, in its current oversold condition, if natural gas keeps falling it is likely to find support near the mid-November low at about $2.80. That would be a loss of less than 10%.

That looks like a good trade setup to me.

Best regards and good trading,

Jeff Clark
Editor, Market Minute