Thursday, June 13, 2013
It's not time to buy natural gas yet. But it is time to take profits on any short sales.
Two months ago, the price of natural gas looked ready to break down. The chart was tracing out a bearish rising-wedge pattern. And we suggested a short trade at $4.30 might work out as the price dropped down to our target at about $3.60.
Here's an updated look at the chart...
The price fell hard last week after natural gas inventories were announced on Thursday. Natural gas prices haven't reached our $3.60 downside target. (As you can see, natural gas is around $3.80 per thousand cubic feet right now.) But traders might want to lock in their profits before this week's inventory report – due out this morning.
My favorite way to trade the trends in natural gas prices is with the ProShares Ultra Natural Gas Fund (BOIL). BOIL is a leveraged exchange-traded fund. So it's volatile and not for the faint of heart. Daily moves of 5% or more are common. But it does mimic the price action of the commodity well.
You can see how well the short trade worked out here...
BOIL has fallen 25% over the past two months, and it has stretched below the downside target of the rising-wedge pattern. That's another reason to take profits on this trade.
But we don't yet have any positive divergence on the MACD momentum indicator (the bottom box on the chart above). So it's too early to use BOIL to speculate on rising natural gas prices. The price needs to consolidate at this level for a while longer – or perhaps work even a bit lower – while the MACD indicator reverses and starts to move higher.
Once that happens, it'll be time to bet on rising natural gas prices.
For now, it's time to take profits on the short trade and just move to the sidelines.
– Jeff Clark
"Perhaps the most exciting aspect of short selling," Jeff says, "is the speed at which profits can occur... it's not uncommon to earn 30%-50% on a short trade in just a few weeks."
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