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 mid-June at about $4.00 per Mcf. Today it trades for $3.00. That’s a 25% 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 August. For seven out of the past ten years, natural gas finished August higher than where it started the month – with an average gain of 6.8%.
It looks to me like there’s a good chance this August will be bullish for natural gas as well.
Look at this chart…
Natural gas closed Friday right on the support line of its January low – near $3. There’s additional support just below at $2.90.
Natural gas is also trading more than 10% below its 50-day moving average line. That’s an extreme move. The proverbial rubber band is stretched below the line.
Granted, natural gas isn’t quite as oversold as it was when we traded it back in April (JMU April 25). But, with the seasonal winds blowing at its back, natural gas looks set up for a “snap-back” rally.
A move back up to the 50-day MA would yield a 12% gain. A rally back up to the resistance line near $3.80 would be 22%.
Meanwhile, in its current oversold condition, if natural gas keeps falling, it is likely to find support near the April low at about $2.90. That would be a loss of just 6%.
That looks like a good trade setup to me.
Keep in mind, though, this is the widow maker. It’s tough to trade. So, keep your positions small enough to avoid getting buried if we’re wrong on the trade.
Best regards and good trading,
Jeff Clark
Editor, Market Minute