Has Natural Gas Finally Bottomed Out?

A few weeks ago, I had a go at catching the falling knife that is natural gas right now. For all of two trading days it looked like that might have been a good call as natty popped around 10%, but then it quickly resumed its drop…

As I have said here many times before, though, my contrarian trading style means that there is always a danger of something like that, so I set up trades to allow for it. In this case, I moved my initial stop up a bit on that two-day jump, so while I did lose money, it was a relatively small amount. That is why, on moves like this, I am not afraid to jump back in when the time seems right. “Once bitten, twice shy” is not a phrase I live by in these situations. Rather, it is “If at first you don’t succeed…”.

The point is, if I have landed on a contrarian position during a big move, there is always a reason. It isn’t just “what goes up must come down” or the opposite for a bearish move. It is either that the fundamental conditions that forced the move have changed or are about to, and/or the price has moved well beyond the point where they are priced in. That doesn’t mean that a reversal will happen immediately, of course. As traders are so fond of saying, the market can stay illogical a lot longer than you can stay solvent.

If that hasn’t changed, and it hasn’t with natty’s drop, it becomes not a matter of if I try again despite losing once, but when I do.

Now looks like a good time.

You may or may not remember, but the initial trade thesis was based on a couple of things. First, the move down was largely about lowered demand due to unseasonably warm weather in Europe and the US., and the clue there is the word “unseasonably”. As Bob Dylan once said “…changes in the weather are known to be extreme…”, and the one thing we know for sure about weather is that it changes. Second, the supply situation that caused NG to jump to over $10 five months ago hasn’t changed that much. The war in Ukraine is still raging.

At some point, then, natural gas prices are going to turn, and now looks like a likely time for that. The reason lies in two charts…

The first is the above, for a three-month time period with one-day candles. NG hit a low of $2.3410, then has spent five days basically moving sideways. To me, that is more bullish than a quick bounce. A retracement can be just a technical adjustment caused by profit taking or some news that doesn’t alter the long-term picture. A sideways move like we see here, though, with multiple retests of a low, indicates real support around a level. It becomes clear why that may be the case when we widen out to a three-year time period…

The $2.30 level off which natty bounced has been extremely significant in the past. In September of 2022, NG gapped through $2.30 and once it had, it never broke back below the level despite multiple attempts. That then became the launch point for a huge move up, so it will inevitably attract buyers now that we are challenging it again.

That not only explains the support, but it also sets up a trade with a stop just below that level or, if that is too much potential loss for you, maybe with a stop below last week’s low. With an initial target around $3.60 and plenty of room beyond that if the market really does turn, either of those stop-loss levels gives a risk/reward ratio that is extremely tempting.

That and the fact that the original trade thesis is still intact mean that even though I have got this wrong before, I will be trying again and going long NG at some point today.