Natural gas has traded lower the last 6 sessions and is currently trading off the lowest levels in 13’. Looking back 16 months one can identify on the chart below that a gap was filled from 4/23 this week. Stochastics are showing the most oversold conditions in 5 weeks when futures managed to rally 30 cents and the last time the down sloping trend line (red line)was challenged in late July. Past performance is not indicative of futures results. The first confirmation that an interim bottom has been established is a trade over the 8 day MA (orange line) a level that has served as resistance since 7/26. Just as the gap was filled from last April I expect the overhead gap from 7/26 approximately 25 cents above current trade to be filled in the coming weeks.
Today much like every Thursday we get an AGA inventory report. The general expectations are to show an injection or around 75 BCF, which is quite a bit larger than 1 year ago an increase of 25 BCF. Being futures are extremely oversold and the sentiment is so bearish and expectations for a larger storage injection I believe there is a potential for an upside surprise.
Now for the trade…
Two Natural Gas trade suggestions:
- Long November futures while simultaneously selling $3.50 calls as a hedge 1:1.
- Back ratio spreads in either October or November selling closer strikes and buying multiple (3 or 4) further out of the money strikes.