- 2016 – 2017 winter season shaping up to be the second hottest on record.
- Current supplies are now over the 5-year average.
- The commodity has lost over 30% of its value from its December high.
Lately it seems Natural Gas just cannot catch a break.
Traders who were bullish just a month or two ago are shaking their heads in disappointment. The notion was the 2016 – 2017 winter season could potentially drain supplies far below the 5-year average. That would be the catalyst to propel price to new highs. As we all know mother-nature had other plans and this winter season will be one for the record books in terms of warmth. So instead of a supply deficit, we have a small surplus headed into spring. This surplus is the reason why you may be driving with the top down in Chicago in February.
However, despite the record setting warm winter, the small surplus we have and let’s not forget the 30% drubbing the commodity has taken since December, we believe Natural Gas will be one of the best trades for 2017 and beyond.
Reasoning
Allow me to remind those with short term memory issues that Natural Gas has rallied 150% off it’s 3/4/2016 low of $1.611 (continuous contract). So a 30% retracement is hardly a drubbing after all. In fact, that is right in line with standard Fibonacci levels. Additionally, the Nat Gas continuous contract looks very different than each individual month contract. Whereas the individual month contracts could set new lows, the continuous contract is still 75% higher and we believe carving out its bottom very soon.
The attached chart shows both our preferred Elliott Wave position and our alternatives. Since we are confirmed to be in a wave 2 retracement period, that pattern can take many paths.
Preferred Path
We’re in a minor wave (iv) of an ending diagonal that should see one more low into the $2.40 area.
First Alternative Path
Natural Gas has bottomed. For that to be confirmed, we need an impulsive rally above $3.513 before any meaningful pullback that stays above the recent low. After which price would trade above the high that breached the $3.513 price.
Second Alternative Path
Price will be mired in a complex WXY pattern which means we will experience a multi-month consolidation in price stays within the range of $3.902 and $2.40 before finally advancing past the recent high of $3.902. In any event, there will be many short term trades to be had on both the long and short side.
Traders should allow for confirmation before committing large amounts of capital.
