Tuesday, 24 April 2007

New Market: Natural Gas - Sell... With a Twist

Sell gas. That's what the latest COTs numbers are telling me.

Natural gas flashed a sell on March 30 when large speculators hit an extreme level of bearishness in their futures and options holdings - a level that in the past has often signalled a turn in this market.

This setup is unusual for a couple of reasons. It's the only market in which I found it was actually profitable to trade on the same side as the large specs - as opposed to fading or trading opposite to this group of traders. COTs cognoscenti will know this is unusual because the large specs are usually known as the "dumb money" who are often wrong at market extremes. Curiously, that wasn't the case for natural gas.

Also unusual is that I didn't find any profitable setup for the short side of this trade. As I explain on the "Profit/Loss Results" page (see the link in the right-hand column), this setup is based on buying natural gas on a buy signal and being in cash during a sell signal (not going short) - like my crude oil trade.

This signal was historically best if executed with a three-week delay. In other words, it should have been executed for the open Monday, April 23. After the original signal, there were two renewed sell signals last week and the week before.

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