CNBC

Cramer: Gauging the power of a nat gas trade

September 23, 2014 6:00 PM

 

You might say this trade is full of hot air. And Jim Cramer couldn't be more delighted.


That's because this trade is all about natural gas.


(New York Mercantile Exchange: @NG.1)


Although fundamentals would suggest ahead of the winter season, the commodity should rally
due to increased demand, natural gas has been difficult to predict, in part due to the abundance
of reserves discovered in North America.


Therefore, for additional insights, Cramer turned to analysis from Carly Garner, a pro the "Mad
Money" host described as "a brilliant technician."


Before getting to the charts, Garner says investors should note that around this time last year
natural gas was even lower; yet it ultimately doubled from August of 2013 through February of
2014.


The history is important because Garner thinks certain key trends may repeat themselves.


First, looking at the Commodity Futures Trading Commission's weekly commitments of traders
report, prior to the big rally last year, large speculators were holding a sizable bearish position,
just under 170,000 futures contracts.


Fast forward to today, and Garner says the report shows large speculators are holding an even
bigger bearish position; they're net short 185,000 futures contracts.


With such a large number of bearish bets, Garner thinks downside in natural gas should be
limited, as it was last year, because there's basically no one left to sell.


Also looking at the weekly charts, she sees some other patterns repeating. Specifically, she says
both the slow stochastic oscillator and the Williams %R oscillator show natural gas as oversold.
Again, looking back to last year, both of these oscillators dropped down to similar levels, right
before a big rally.


However, Garner isn't saying buy nat gas hand over fist; a rally may not happen right away.


As compared to the weekly charts, the daily charts are not quite as bullish; Garner says natural
gas has yet to reach oversold levels. Therefore, she thinks natural gas could decline in the short
run, but given the trends outlined above, it should be followed by strength over the next few
months.


Looking at potential upside, Garner says nat gas faces a ceiling of resistance at $4.10, but if it
can break out above that level, then she thinks it's a straight shot to $4.62 or even $4.90.


Conversely, the downside may be limited. Garner sees a floor of support at around the $3.80
level.


All told, Garner thinks investors should watch the price action very closely and prepare to pull
the trigger strategically. Although she's not looking for a double like last year, she could see nat
gas rallying from about $3.85 per million British thermal units, where it is right now, up to $5, a
significant move.


Cramer shares the outlook. "I think Garner's likely to be right, and while that's good news for
people betting on natural gas futures, it's even better news for the domestic companies that
actually produce the stuff, which to me, would be the best ways to play a rebound in natural gas."


Call Cramer: 1-800-743-CNBC


Questions for Cramer? madmoney@cnbc.com


FUTURES AND OPTIONS TRADING INVOLVE SIGNIFICANT RISK OF LOSS AND
MAY NOT BE SUITABLE FOR EVERYONE. OPTIONS, CASH AND FUTURES
MARKETS ARE SEPARATE AND DISTINCT AND DO NOT NECESSARILY
RESPOND IN THE SAME WAY TO SIMILAR MARKETS STIMULUS. A MOVEMENT
IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE
RELATED FUTURES & OPTIONS CONTRACT BEING OFFERED. SEASONAL
DEMAND AND CURRENT NEWS IN COMMODITIES ARE ALREADY REFLECTED
IN THE PRICE OF THE UNDERLYING FUTURES.