Monday, January 28, 2008

Sleeping Bull?



Above is a 5 year weekly continuation chart of natural gas futures. You'll notice for the past 2 years Natural gas has been in a trading range from $4 to about $8.

Below the price chart are three colored lines which show the net activity of the large, small and commercial traders. What I am interested in is the red line which represents the net position of the commercial traders.

When the red line is below the zero line, it means the commercial traders are net short, above the zero line the commercials are net long. As you can see the commercial trader are not only very long, but this is their largest net long position in the history of this contract. In my opinion, this is extremely bullish and I am anticipating a significant move up at some point.. Lets keep an eye on this market. The above chart is courtesy of barchart.com

3 comments:

boulderbob said...

Kevin,
Do you think UNG is a good way to play this. WHat is the best way?

Narayana said...

Back in September 2006, commercial traders appeared to be extremely short. Applying your logic, that should have meant that prices would decline further, but instead they rose. What makes you think prices will go up (instead of down) now that commercials are long? Thanks for your insights!

Kevin said...

Hi Nirayana,

What makes me think prices will go up instead of down? Experience.
There's more to it than just looking at what the commercial traders are doing. You have to take into account many factors before forming an opinion...things such as seasonality, what percentage of the open interest the commercials represent, market sentiment, what price is doing...etc.

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