Natural Gas: My Best Commodity Trade Of 2018, However, What About 2019?

|
Includes: BOIL, DGAZ, FCG, GASL, KOLD, LNGLF, NGS, UGAZ, UNG, UNL
by: Sandeep Singh Ahluwalia
Summary

I expect the level of short positions to start reducing as Natural Gas is approaching a key support level.

Warm weather poses a major threat to Natural Gas’s bulls.

I am leaning towards the Natural Gas bears being in the driver's seat.

Natural Gas (UGAZ, UNG) was my most profitable trade for the commodity segment in 2018. This is as I had highlighted in my article on 29th October 2018 that I expect Natural gas prices to have a steep ascent. This proved to be true as the commodity commenced a bull run from 30th October up until 14th November which resulted in the price rising from $3.100 to 4.837. This in turn provided investors with a return of roughly 62% in a span of 12 trading sessions.

However, the big question now is how will natural gas be performing over the next one to three weeks. Hence, to answer this, I shall look at the fundamental news affecting the commodity, whilst also analysing the charts using technical analysis tools. Nevertheless, I shall place a higher emphasis on technical analysis as it has proven to be highly accurate in predicting the price trajectory of the commodity in 2018, as has been seen in a number of my prior articles.

Fundamental news:

Open interest:

Open interest refers to the total number of open long and short positions in the futures market for a respective asset. For natural gas, the open interest metric has been on the rise since the beginning of 2019. I say this as at the end of December 2018, the open interest level stood at 1.2 million contracts which have risen now to 1.33 million contracts as of last week. This in turn indicates to investors that the speculative short positions are rising which is what has caused the commodity's price to fall in the prior few days. However, I expect the level of short positions to start reducing as Natural Gas is approaching a key support level.

Weather:

Warm weather poses a major threat to Natural Gas as it shall cause the price of the commodity to have a sharp descent. Thus, I believe in the coming weeks, the largest threat to the price of Natural Gas is the warmer weather expected which in turn shall cause the demand level for the commodity to dip. I say this as the cold spell is expected to end soon which will help Natural Gas bears stage a further descent.

Technical Analysis:

Daily chart:

Natural Gas The daily chart of Natural Gas indicates to investors that the commodity will be having a further downwards descent. However, I do not expect it to be a sharp descent as I believe the commodity will form a sideways pattern that will cause it to decline slowly over the coming days. I say this as the commodity’s lagging line had broken out of its Ichimoku cloud pattern which is what triggered the sharp descent. However, the pace of the descent shall now slow down as the short-term RSI has reached the 3 mark. This indicates to investors that a sideways pattern of lower lows will be forming soon. Moreover, the 50-day moving average is about to break below the 100-day moving average which indicates to traders that a further decline is on the cards.

On the price target front, I expect Natural Gas to fall until the range between the 100% and 127.2% Fibonacci support levels. The 100% Fibonacci support level is at 2.642, whilst, the 127.2% Fibonacci support level is at 2.353. However, I do not expect the commodity to fall beyond the 127.2% Fibonacci support level as this is a long-term candle support zone.

The big picture:

Overall, Natural Gas is presently providing traders with several signs that the downward move has not come to an end. However, I expect the decline to occur gradually via a sideways pattern which shall cause the commodity’s candles to have lower lows. I say this as the technicals indicate to investors that such a pattern is being formed. Nevertheless, whichever way you do decide to trade, do ensure that you utilize trailing stops, as this shall aid in capital preservation.

Good luck trading.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.