Strange Behavior For Natural Gas…

| August 12, 2013 | 0 Comments

nat gasSomething strange happened last Thursday…

That’s when the US Energy Information Administration (EIA) released their weekly natural gas inventory report.  For the week of August 2nd, storage inputs jumped to 96 billion cubic feet (bcf)– much larger than the 76 bcf storage addition expected by analysts. 

In case you’re unaware, this is decidedly bearish data for the natural gas market… 

It pushes total US inventories to 2,941 bcf, which is basically inline with last year.  What’s more, this week’s reading is much higher than last year’s reading of 24 bcf and the 5-year average build of 40 bcf.

Clearly, there’s plenty of natural gas available to the market right now…

But the weird thing is, after a quick sell-off, natural gas prices actually rose on the day.

Take a look…

Natural Gas

As you can see, natural gas put in a technical reversal pattern called a “hammer” last Thursday.   When you see one-day reversals like this in a stock, it’s usually a perfect time to buy as it signals a potential bottom in the market.

But commodities are weird…

They trade differently than stocks in that underlying fundamentals play a bigger role in their short-term movement. 

In other words, stocks can gyrate 10-15% or more based on technicals alone.

In fact, if the chart above were for a stock, I would establish a bullish position without hesitation.

But since this chart is of a commodity, I wouldn’t even consider a bullish trade without fundamental data supporting it.   In other words, weekly storage data would have to be in-line, or below, analyst estimates.

So why did natural gas rally on such bearish data?

It was likely a short seller locking in profits on the initial market downdraft after the report was released.  But once this bearish investor was done covering his/her short position, there weren’t any buyers to be found. 

As a matter of fact, natural gas gave up a large part of Thursday’s gains on Friday when it dropped 7 cents, or 2.12%.

And that’s not all…

If last Thursday’s unusually large storage build wasn’t enough, August is already a seasonally weak period for natural prices.   The market generally prices in end of Summer temperature drops and the larger storage builds they create. 

That means there are two important fundamental reasons to sit on the sidelines in natural gas over the next few weeks.

This is a perfect example of how you must balance fundamental and technical data in your commodity trading…

Commodities are different than stocks.  You can’t rely solely on technical signals to be a successful commodity ETF trader/investor.  You must have both technical and fundamental data supporting your trade.

Stay tuned for more trading tips in future issues of Commodity Trading Research!

Until Next Time,

Justin Bennett

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Category: Energy, Natural Gas

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.