Natural gas is due for a bounce, but...
Key points
- Natural gas has plummeted since late November
- On a technical basis, the market is due for a bounce
- Nevertheless, traders should be cautious about trying to play the long side of this volatile market
Natural gas reverted to its usual seasonal form in Q4 2022
The chart below displays the annual seasonal trend for natural gas futures.
In this article dated 2022-10-25, I pointed out that natural gas was due for a seasonal peak during the 4th quarter of 2022. However, I also pointed out that natural gas seasonality had been out of whack (having fallen hard from Trading Day of Year (TDY) #184 through TDY 210 - a period that typically sees significant strength).
The peak did NOT come near TDY #210. Instead, the actual peak in NG prices occurred on TDY #232 - right between the two last seasonal peaks highlighted in the chart below.
Since that time, the decline in natural gas has been relentless - as you can see in the chart below. Natural gas has now reached an oversold level that intermediate-term reversals have often followed.
Nevertheless, the annual seasonal trend strongly warns about the dangers of playing the long side of natural gas in the near term.
A most unfavorable period
The tendency for weakness in natural gas during the first 41 trading days of the year is unmistakable in the chart below.
The chart and table below display the cumulative hypothetical dollar return from holding a long position in natural gas futures during TDY #1 through 41 each year since natural gas futures started trading.
What the research tells us…
Natural gas has plummeted over -60% since its peak in August 2022. This includes a -48% decline in the last five weeks. Typically, nimble traders would be looking for an opportunity to play the long side of an oversold bounce. And such an opportunity may arise. But natural gas is an exceptionally volatile market with a very distinct history. Playing the long side during the first quarter of the year can be profitable, but it is the trading equivalent of playing with fire. The savvy play in natural gas may be to wait for a bounce and then once again pursue the short side of the market.