Potential Slingshot Rally

In my August 15^th and September 12^th Energy Alerts, I discussed seasonal factors supporting hedging your cost of Natural Gas and Electricity at this time. If you have not already read my last 2 Energy Alerts, they are available by clicking on August 15^th and September 12^th Energy Alerts

In both Energy Alerts, I referred to the chart below, which showed the seasonal pattern of Natural Gas over the last 22 years.

The chart was built by averaging the rate over the last 22 years and I said the chart can be used as a guide for entering hedges within a certain time frame, but not to assume the seasonal low would be reached precisely during the first week of September.

As a trader I look for repeatable patterns and in the above chart there is a potential extraordinary buying opportunity I want to draw your attention to. The final low tends to take place after a consolidation pattern and one last quick downside break. After consolidating 7 weeks from the middle of July there normally was one last sharp decline prior to an explosive fall rally. I refer to this phenomena as the slingshot effect.

As a trader I have seen this many times. When a market is preparing to move higher after an accumulation period, sometimes it will make a false move down first to take out weak long positions prior to experiencing a sustained rally.

 This year as you can see in the chart below Natural Gas has been consolidating since the end of July.

The market was unable to rally due to continued mild weather in the Midwest and Northeast, but at the same time it did not break below its July 28^th low. But with mild weather forecasted till the end of October we may experience one last sharp decline prior to an explosive fall rally as I mentioned above.

There is one other point I want to make from the above chart. Commercial Hedgers as shown by the green line have been accumulating buy positions since July. Over the years, I have found it was wise to follow the lead of Commercial Hedgers. They are more highly capitalized than traders and have a vested interest to move the market based on their capitalization. Large Commercial Hedgers were also holding large buy positions this time last year, and I wrote extensively about this indicator in my 10/25/13 Energy Alert, which was one of the factors that helped me predict last year’s explosive rally.

If you have been holding out hoping for lower rates you could be rewarded soon, but remember if there is a near-term downside break it will likely precede an explosive fall rally so don’t hesitate in securing your rate.

If you secured your hedge during the consolidation period over the last 2 months don’t fret, after a brief decline the fall rally will likely take prices far above present price levels. 

Not every client’s risk tolerance and hedging strategy is the same, but we trust the above report will help you put into perspective the risk/reward opportunities at this time. I invite you to call one of our energy analysts to help you plan a hedging strategy appropriate for your situation.

Ray Franklin
Senior Energy Analyst