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Friday, March 30, 2012

WHAT'S GOOD FOR THE GOOSE IS GOOD FOR THE GANDER




When I thought about how I have harped on Gold as being a big bubble, our crazy uncle Natural Gas is the opposite. This weekly chart above almost looks like Gold turned upside down. This market has just been pummeled for years now. Similar to Gold yet in inverse fashion, some very good traders have been trying to invest money into this beaten down area hoping to catch the bottom. Needless to say those trades and or investments have not worked out very well so far. If you look at the POIV indicator here in purple, look at the huge amount of distribution we have had. I cannot remember ever seeing anything this extreme with POIV.

We also have some interesting things going on with the COT report here that are worth mentioning. The normal patterns have a few different looks and I have labeled one of them here. In that instance you can see a big down trend that had a bounce. During that bounce the commercials sold pretty aggressively, giving us a nice sell signal and entry. This is the best possible signal you can get with COT data. Often they are just hedging, so they will be buying heavily during big down trends like this. You can certainly see several instances of this on this chart. I have marked off another situation which is unusual, and it occurred 3 times in this market.

This situation features what is called capitulation. In these instances, you can see at the end of moves down that got extreme, you actually saw commercials give in and get heavily short. When this happens it is basically them crying uncle. They have lost enough money on their hedging that they are not willing to lose any more. When we see this often a tradeable bounce or much more than that is not far away. You can see this is happening now, with the commercials doing quite a bit of selling in recent weeks. With the price dropping as sharply as it is, this makes me think we might be close to an important low here.

If you study charts and look for this type of thing you will also notice it was in place at the last major top in Oil prices, before they had their precipitous decline down into the 30's after going over $100. This type of situation is no where near a trade today type of thing. However, it bears watching to see if we happen to get a trend change while this type of thing is going on. If we do, this could wind up being very interesting on the long side. One thing that seems to get lost about commodities is that although they are known for trending better than stocks, they are also much more mean reverting than stocks are. Long term charts tend to look more like EKG's than slopes like this or Gold that gone on for this long.

Timing the turns from a trend this severe is impossible. You could have argued that this has been extremely oversold for years and been right. Oversold can get more oversold, overbought can get more overbought. This is essentially an inverse bubble, and there will be some big money made when this sucker does an about face. Maybe we are seeing the underpinnings of a fundamental condition that could lead to this trend changing.

7 comments:

Anonymous said...

I believe the similiar phenomena occured at the top in the silver market last year.

Squire said...

One fundamental: New world-wide discoveries of natural gas have driven down the price. Not understood is how difficult it will be for many countries to actually extract the gas. When the degree of this becomes know, I think the price will start trending up.

Michael Treyder said...

i was short this contract for a bit of time and when i got out for decent gain, i was all smiles and gentlemen's-club-celebration thinking that was all there is to it. boy, was I wrong.

Anonymous said...

Bubbles pop because they are based on emotion and emotions change. Nat gas is not a bubble in reverse. Price here is based on supply and demand. Uless supply dries up (hard to see how, unless companies stop producing due to low prices, which is actually happening a tiny little bit) or demand explodes (again, hard to see how... unless we start running cars on nat gas) this price is stuck in the gutter.

Not sure what Squire means about it being hard to extract. Deep directional wells have their challenges, but nothing compared to the challenges of ultra-deep water wells in offshore fields, and every country that has one of those is developing it as fast as they can with little trouble at all. No wells are "easy", but gas is not comparatively hard.

Anonymous said...

Hi Mr. Chris:

This comment is not specific to this particular blog entry.

You have been saying recently that the recent behaviour of the stock index futures, and the indices as wholes, are a result of FED activity.

Back in the aftermath of the 2008 "crash", we saw substantial bailout activity on behalf of the FED.

I wonder, is the market support, sponsored by the FED, a repercusive attempt at mitigating the losses of the ill-proposed plans the FED made back in the big bail outs of the 2008 crash?

What do you think?

Yaaarrgghh,

A Pirate I Be!!!

Matej Marek said...

interesting paper about increased correlations across commodity markets in recent years. Authors believe it's due to HFT activities:

http://peterlbrandt.com/must-read-for-commodity-and-commodity-etf-traders-u-n-paper-on-the-structural-changes-of-markets-from-hft/

Chris Johnston said...

What the FED is doing and has always done since the PPT was formed is propping something up that would otherwise not be at this level.The job of the PPT is to prevent plunges. I think it has morphed now into a political tool to help get presidents re-elected. At times their actions do fail like back in 07-08, but as traders we know all trades don't work no matter what your method. Even the PPT cannot overwhelm across the board liquidations. When volume gets low like it has been in the last couple of years they can take stock prices wherever they feel like taking them. You can see how easily they can move prices up on down days in the last hour when the volume is really light.

As far as the HFT, yes I think I would agree that likely has had a big influence on this. I have written here in the past that it is being enhanced by the large funds and how their trading algorithms are written by whiz kids.

As far as Natural Gas goes, I don't trade based on my opinion of what I think might be the broader economic picture in an industry. When I see something pushed to this much of an extreme, I look for reversions. There is certainly no sign of a trend change yet.