This has been a very profitable week. Not only am I steering clear of this volatility and sitting in cash, but I’ve also been recommending that people drive natural gas prices into the ground. Historically, it has failed to find support above $6.00.
But what we’ve witnessed over the last month has been an epic collapse in prices. The so-called Widow Maker trade – a bet on spreads for the March and April period – has completely collapsed. Markets thought that we were going to have serious natural gas shortages heading into the end of the year.
Natural Gas in the United States
I remind people all the time that the United States has a virtually unlimited supply of natural gas. The massive surge in prices earlier this year fueled a boom in production. Tack on new forecasts of a mild winter on the weather front, and it’s a mad dash for the exits.
We’re witnessing a huge collapse, and I wouldn’t be surprised to see a number of hedge funds implode (if they haven’t already). Now, some people will say – How could you forecast a collapse in natural gas prices. Well… how about this chart?
ProShares UltraShort Bloomberg Natural Gas (NYSE:KOLD) is a triple-bearish ETF on gas prices. It’s already doubled in about a month, history could repeat once again and get back to the $30s.
Natural gas prices would probably need to fall down to around $3.00 to get to that target, and I’m projecting that direction. It would be fast and furious, and unexpected for so many people.
If history is a guide, then we’ll see about three months of weakness on natural gas prices, and plenty of leverage leaves the market.
If you’re going to trade KOLD, you need to be careful because of the leverage. But you could look out to May and speculate on some of the options on the fund and not have to risk too much capital. Otherwise, buy the fund, and just set a trailing stop around $10.
You might not be as aggressive as I am, so consider shorting the United States 12 Month Natural Gas Fund LP (NYSE:UNL) instead. There isn’t leverage in this fund, and it’s pretty directional. A return to about $8.00 is my target here.
I don’t see a rebound on the horizon for natural gas. Don’t fool yourself into thinking that you can predict the weather. Focus instead on the price trend, which has been squarely downward for the last few weeks.
Momentum in the market is still negative. About 68% of stocks are trading under their 50-day moving average. More than 58% of stocks are under their 200-day moving average. I want to see two straight days of positive gains, and I want to ensure that the S&P 500 can sustain above the 4,590 level. Don’t blindly dive into this market just yet. Cash remains your best friend.