What to Do With the Widow Maker Trade

The “easy money” has been made on the Widow Maker trade. Anyone who bought natural gas based on our recommendation on April 25 should take profits today.

It’s not that the price of natural gas is headed lower in the days and weeks to come. Heck, it might even continue higher. But, the risk/reward setup for the trade has shifted. It’s not as favorable as it was two weeks ago.

Here’s an updated chart of natural gas…

Two weeks ago we noted natural gas had resisted its seasonal tendency to rally during April. Instead, the price had fallen 33% in about six weeks. And, natural gas was trading historically far below its 50-day moving average line. That’s an oversold condition that often leads to a sharp, snap-back rally.

So, we speculated the seasonal rally for the commodity had been delayed for a few weeks. And, buying natural gas near $3.00 per mcf represented a good risk/reward trade.

With the price already so far below its 50-day MA, further downside seemed minimal. Even a modest rally back to the 50-day MA could yield large profits.

Now though, with the price of natural gas back to its 50-day MA, the risk/reward setup for staying in the trade is about even.

The price could keep rallying and natural gas could challenge its March high near $4.40. Or, it could find resistance at the 50-day MA, reverse, and head back down to the April low near $3.00.

From the current price near $3.70, the widow maker trade offers $0.70 of potential profit and $0.70 of potential risk. Betting on natural gas right here is like betting on a coin flip.

That’s not a good setup for a trade.

Traders who bought natural gas based on our suggestion two weeks ago should cash out now and look for a better risk/reward setup someplace else.

Best regards and good trading,

Jeff Clark
Editor, Market Minute