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Potential Breakout for Natural Gas by TrendFollower

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Natural Gas seems to have broken its recent trading range. Whether this is a false breakout time will tell. At the moment it is trading above its 20, 50 and 100 DMA's and approaching its 200 DMA based on the 'daily' timeframe / chart. This is bullish short term. I would like to see the moving average curves slope upwards for confirmation but this is an asset if you get in early and are right in the direction of the trade then can reap big rewards. It is very volatile and I have been burnt before so this is not an asset that novice or inexperienced in trading commodities should dabble in. 

I include the 'daily' chart below to illustrate my MA's point above.

1562356848_NaturalGas_20190907_22_17.png.fb8665223e64a502d2e0bf4601d1d5c3.png

Now one must look at the fundamentals to see if one can begin to understand the reason for the recent potential price breakout from the trading range. 

From a fundamental perspective, it is well documents that China's Natural Gas demand has been booming for years. The problem is the large supply glut in the US.

The EIA recently reported an increase in the supply of domestic Natural Gas rose by 84 billion cubic feet for the week. There has been hotter temperatures recorded in the US which may have boosted Natural Gas prices short term. 

One thing to remember is that any upside move could be related to short covering as there will be a lot of short contracts that will need to unwind in the months ahead. One should keep monitoring the price action and try to ensure any moves make sense and are supported by fundamentals as this is what large upwards rallies in Natural Gas are based on. The speculation comes a little bit later. The herd even later. 

It is about identifying the potential strongest trending assets as early as possible but they will not all be successful. Therefore when using this approach in Commodities I find it is important to ensure some fundamental analysis is conducted so one can understand if the price move is backed by a strong narrative which makes sense. Weather and Supply and Demand are the two key concepts one must investigate when looking at trading Natural Gas both on the long and short side. 

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Natural Gas is continuing its breakout price action. It seems to be heading towards 2800 when looking at the 'daily' chart which I include below. It has also crossed its 200 DMA on the 'daily' which is another bullish indicator for a potential long trade on Natural Gas. 

1926987451_NaturalGas_20190914_10_29.png.cbe5765f0fea23cb4a6e76f39a66e1c0.png

Of course trading Natural Gas comes with its own unique warnings so one must tread carefully and have robust risk management in place. 

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When you begin looking at Natural Gas from a fundamental perspective to try and better understand the reason for the recent price action, you begin to uncover certain key points. So first of all, in case some of you are not aware the US is the biggest producer of Natural Gas. It is using more Natural Gas to generate electricity and it is increasing the amount of Natural Gas it is exporting to the rest of the world. Therefore from a 'demand' perspective one could say that recently demand has been increasing. Now historically it is well documented that there was a huge or even enormous supply glut of Natural Gas. This depressed prices. The US has also witnessed certain weather conditions which has affected the production and use of Natural Gas. 

Now one must not get carried away with the recent price action. There is still a big supply glut of Natural Gas and if demand were to decline then prices could continue to go downwards. This is the risk any trader looking to trade on the 'long' side faces.

What we could be seeing is short covering as the number of short positions to long position are around 3 to 1. 

This is why one must have stop losses in place and one must trade the price action but not get emotionally attached to any potential long term story or narrative that the media presents. It is ok to go 'long' on Natural Gas based on the current potential breakout and price action. It is also ok to go 'long' based on the price going above its 20, 50, 100 and 200 DMA. However this could reverse violently and quickly so stop loss management is important. Should there be any decrease in demand and continued increase in supply then it would not surprise me for Natural Gas to go below $2.00. Right now it seems to be that the price may head towards $2.80 so I am intrigued to see if the price reaches this level. If it does then the $3.00 price level looks a potential possibility. 

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There have also been a couple of reports of explosions in Natural Gas fracking operations during the past couple of days. Add to the mix the Middle East tensions and one begins to see some weight behind the price action of Natural Gas. This coming week will be rather interesting to see if the breakout potential continues. 

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Right now everyone is looking at trading US Crude Oil and Brent Crude Oil. This price action is based on the Saudi drone attack. Prior to this there was no clear direction for Oil from a trading perspective and it was rather range bound and choppy. 

Natural Gas prices have not reacted like the Oil prices. However the following was reported yesterday:

"Saudi Energy Minister Abdulaziz bin Salman said the attacks also led to a halt in gas production that will reduce the supply of ethane and natural gas liquids by 50%."

Now when the US markets open today there is the potential of speculative capital flowing into Natural Gas and it could also see a major spike today. Now there is lots of supply in the US and that glut has been around for a long time and many years so this event will not change that. Therefore any spike in prices should result in a downwards sharp drop shortly after. 

Now obviously I have made a trading assumption. The price action will test my assumption. The current price is $2.67. Let's see what the price is later on this evening. 

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@TrendFollower

I'm with you on this one, I think the market has been very focused on the movement of oil but have forgotten that this will also affect NG.

I'm also prepped for Defense stocks as Trump has flexed his muscles, and the US is a large supplier of defense to KSA.

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@AbDXB1345,

If you look at both Crude and Brent Oil charts against the Natural Gas charts on the 'daily' then you will see that Oil is still in a downtrend where as Natural Gas is looking like it is breaking out from its downtrend. It seems the downside may have been priced in to Natural Gas where as Oil could have further to fall. Now this may not happen but if you look at both Oil and Gas on the 'daily' then you will see why I am suggesting this. Of course it is only a trading assumption but nevertheless it will be interesting to see how this plays out.

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Natural Gas is now deciding to flex its muscles and motor upwards. I hope those of who are are using leverage are enjoying the profits here.

1798854245_NaturalGas_20190916_13_14.png.f9c24ea7fd7111927e6e25a06a25ac4a.png

It looks like it will try and go for 2717 which it hit earlier. 

 

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@AbDXB1345,

Natural Gas hit 2727 and is up around 3% at the time of writing this post. 

There have been many who have asked me what is a strong trending asset and here is an example of a strong trending asset since the end of August 2019 to date so around 2-3 weeks.

Natural Gas may only be a trade that lasts 1-2 months on the long side but there is profit to be made so it is a case of riding the trend until it changes as based on my past experience the volatility can be ruthless. However, the pullbacks will be sharp and it is important not to exit on a pull back but a confirmed trend reversal. The pull backs will feel like they are a trend reversal due to the sharpness of them but based on my own personal experience one needs to be monitoring the price action like a hawk.

One also needs to be following the fundamentals of Natural Gas closely too. One must be aware of the supply and production which gets reported and be aware of the demand forecasts against actuals.

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As both Brent and US Crude Oil take a tumble and come back down to earth once the day traders and speculative capital take their profits, Natural Gas, is proving more stable though it too is correcting as I type this message. 

I now want to see if this is a mere pull back and then the uptrend resumes or whether downward pressure builds. 

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