Today's Idea

The recent rally in Natural Gas futures appears to be short-covering in nature, with little in the way of a bullish fundamental shift, at least in the near-term. Some bearish traders may wish to consider using the current price rally to explore buying bear put spreads in Natural Gas futures options. For example, with March Natural Gas trading at 2.640 as of this writing, the March 2.600 puts could be bought and the 2.300 puts sold for 0.100, or $1,000 per spread, not including commissions. The total investment in the trade would be the maximum risk on the trade, with a potential profit of $3,000 per spread minus the premium paid which would be realized at option expiration in late February should the March futures be trading below 2.3000.

Fundamentals

Even the biggest bear markets will have significant upside price corrections, and this has been made evident by the recent rally in Natural Gas futures, as prices rebounded over 15% the past two sessions after trading down to 10-year lows. Almost all bear market rallies need some sort of catalyst to spark a round of short-covering buying, and in the case of Natural Gas, there were at least two. First, on Monday, Chesapeake Energy announced plans to cut its Natural Gas production by 0.5 billion cubic feet (bcf) per day, or nearly 8% of its total production due to low prices. If that weren't enough to get weak bulls to cover, the Energy Information Administration issued a report that the Marcellus shale play may not have as much potential gas production potential as earlier thought. These two catalysts combined with a rather large net-short position being held by large speculators were all that was needed for weak bears to run for the exits, triggering buy stops along the way. Now the question becomes how much further the rally has to go, especially given the huge amounts of Natural Gas in storage and long-term weather forecasts calling for above normal temperatures for the eastern US, which if accurate, will diminish demand for Natural Gas for heating purposes. A quick look at the daily front month's chart for Natural Gas futures shows the next significant resistance area does not come into play until the 3.000 area, and any move above this level may be met with renewed selling by commercial hedgers -- especially if the current fundamentals remain bearish.

Technical Notes

Looking at the daily chart for March Natural Gas, we notice the "reversal" day on Monday, when prices made new lows only to close sharply higher than the previous day's trading range. Notice how the 14-day RSI was deeply into oversold territory, with readings falling to the mid-teens late last week. Trading volume also began to accelerate during the past several sessions, in what may have been a final throwing-in-the-towel by stubborn longs just before the market staged its reversal. Monday's low of 2.289 will now act as support for March Natural Gas, with near-term resistance found at the 20-day moving average currently near the 2.885 price level, and major resistance seen at 3.000.


Mike Zarembski, Senior Commodity Analyst

Support / Resistance & Oscillators
	S2	S1	Pivot	R1	R2
Mar Natural Gas Pivot	2.471	2.536	2.620	2.685	2.769
Mar Natural Gas Chart		2.289		2.885

Today's Highlights and Economic Data
Economic Report	10:30 AM ET: EIA Energy Stocks FOMC Meeting
FND / LTD	None

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