Natural Gas Seasonal Low In Place?

07/27/10 02:50:43 PM

by Donald W. Pendergast, Jr.

For the past 20 years, the seasonal pattern in natural gas futures confirms that this energy commodity usually trades at its lowest price of the year sometime between mid-July and late August. Will the pattern hold this year?

Security: NG, UNG
Position: Accumulate

It took a full 14 months for natural gas futures prices to make a meaningful, enduring low after the massive commodity-wide market liquidation started in early July 2008. Two years after the carnage began, however, nat gas prices have appeared to stabilize, although at prices about 65% below their mania-induced peak of $13.69. We'll take a quick look at the weekly chart of continuous-contract natural gas and try to determine if there is reason for continued optimism among energy market bulls.

FIGURE 1: NG, WEEKLY. A rising trend, an approaching seasonal low, and attractive accumulation patterns all suggest that selling deep out-of-the-money puts in December natural gas might be a very low-risk proposition for skilled traders.

Graphic provided by: MetaStock.

Graphic provided by: CS Scientific Expert Advisor from MetaStock.

Figure 1 is a simple chart, yes, but it says several things to a serious technician:

1. With a much higher swing low now established and a decent uptrend line now at work, the line of least resistance appears to be up — especially if the recent swing high of $5.20 is exceeded soon.

2. Both the positive volume index (blue line) and the negative volume index (red line) are beginning to turn and/or trend higher, a bullish sign indicating continued accumulation.

3. Nat gas recently closed above its 10-week exponential (EMA), which, while not earth-shaking by itself, is another positive sign that an emerging uptrend may be in the works.

4. Finally, the seasonal aspect of this chart setup is just too powerful to ignore, and when combined with the rest of this technical jargon, leads me to believe that a very low-risk put option sale opportunity is right here, right now.

At of Thursday's close, a $3.70 strike put option for December natural gas futures closed at $0.051 or $255 before commissions. This option is about 28% out of the money, and with only four months left until expiration, this could be a put sale worthy of further investigation. One way to play this seasonal setup is to sell one put now, hoping for a minor decline a month from now to pick up a few more at better prices. The nat gas seasonal pattern is one of the more reliable ones out there, highly dependent on industrial supply and demand factors as it is, so this could be one way to play it.

The key is to set a firm "get-out" price at which you will buy the option(s) back for a modest loss, hopefully for $255 or less per put sold. Generally speaking, buying back short options that have doubled in price is a stress-free way to manage the occasional option sale that goes haywire. Check with your broker and see if you are qualified to trade futures options in your account and then do a little more research on your own before actually taking this trade. It could be time well-spent.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title:	Writer, market consultant
Company:	Linear Trading Systems LLC
	Jacksonville, FL 32217
Phone # for sales:	904-239-9564
E-mail address:	lineartradingsys@gmail.com
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Natural Gas Seasonal Low In Place?

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