Test of Long-Term Moving Average a Buying Opportunity?

My reports focus on Natural Gas because it is now the largest source of energy for the generation of Electricity; therefore, Natural Gas and Electricity rates are highly correlated.

Starting with my March 7th Energy Alert, as shown in the chart below, I warned Natural Gas was forming a similar pattern to what we experienced in the spring of 2012, which is a characteristic of a Bull Market:

Also since my March 7^th Energy Alert, I pointed out 2 other characteristics of Bull Markets were a pattern of higher highs and higher lows and backwardation in which nearby contracts sell at a higher price than contracts further out. Both patterns are still in place, and in today’s Energy Alert, I will point out a 3rd characteristic of a Bull Market. They trend higher and remain above the long-term moving average.

Technical traders track a variety of moving averages, but the most common long-term moving average used to define long-term trends is the 200-day Moving Average. When a market is below the 200-day Moving Average the long-term price trend is down, and when a market is above the 200-day Moving Average the long-term price trend is up.

Natural Gas was below the 200-day moving average from the middle of 2014 until 5/31/16. The chart below shows the price action of Natural Gas in 2016:

Natural Gas prices declined in the fall of 2015 due to fear an El Nino induced warmer than normal winter would lessen demand and prices tumbled and reached a 17 year low of $1.684 MMbtu on Dec 18^th. But prices were primed for a rally and cold weather in late December triggered short covering leading to the first failed test of the 200-Day Moving Average shown on the chart above.

As feared January and February were the warmest on record and prices again tumbled and reached a slightly lower low of $1.611 MMbtu on Mar 4th. It was at this point that I wrote my March 7^th Energy Alert stating the 2 major ingredients for a major bottom were in place. Unsustaintably low prices and a high level of negative news.

After reaching the Mar 4^th low, Natural Gas prices rallied to the second failed test of the 200-day Moving Average in late April as shown on the chart above. But after failing to penetrate the 200-Day Moving Average in late April, Natural Gas experienced a shallow pullback in May, but maintained the pattern of a higher low, which was a signal the next move higher was coming soon. The rally that followed was swift and in just a few days on May 31st, Natural Gas penetrated the 200-Day Moving Average leading to an explosive rally.

Since breaking through the 200-Day Moving Average, Natural Gas continued to trend higher leading to its next higher high of $3.366 MMbtu on Oct 13th. Since reaching this high we experienced very mild weather and prices pulled back sharply to test the 200-Day Moving Average on Oct 26th. But it is not surprising prices held the 200-Day since long-term trend followers consider pullbacks to the 200-day a buying opportunity.

The question is where will prices go from here?

The mild weather we experienced since mid-October is expected to continue until mid-November, but several meteorologists are forecasting colder weather will arrive in the second half of November. Therefore, I believe Natural Gas will likely hold above the 200-Day near-term, and we are close to another sharp rally in Natural Gas and Electricity rates.

Therefore, if you have not already hedged your cost of Natural Gas and Electricity, I recommend you take advantage of the recent test of the 200-Day Moving Average to hedge your cost of Natural Gas and Electricity near present 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 Commodity Analyst
727-400-3170