As we begin to head into the holiday season, I want to look at a sector that often makes a lot of upside moves during this time.

That sector is natural gas, where the prices have been ripping higher.

Just look at this chart of the United States Natural Gas Fund (UNG) – an exchange traded fund (ETF) that tracks the price of natural gas…

(Click here to expand image)

UNG is up more than 80% since June. And, most of that gain came in the past four weeks.

The price is rising as we head into the winter months. Natural gas traders are expecting a cold winter, and they’re buying natural gas now in anticipation of a sharp increase in demand in the coming months.

This move has gotten extreme, though. UNG rarely strays more than 8% from its 50-day moving average (MA) before reversing and coming back towards the line.

Yesterday, UNG traded nearly 30% above its 50-day MA (the blue line). The MACD momentum indicator also reached the most extremely overbought condition we’ve seen all year (the blue arrow).

This is setting up for one heck of a reversal trade for anyone with the guts to make it.

Of course, it probably seems crazy to even think about shorting natural gas when the weather is about to turn cold. But, if history is any sort of a guide, this is usually the best time to make that trade.

Let me explain…

You see, natural gas prices often run higher just before the weather turns cold. Traders anticipate the increased demand for natural gas. Then, they buy natural gas futures ahead of time. And, their actions push up the price.

By the time the cold weather finally rolls around, the price of natural gas has already discounted the increased demand. That’s when the price peaks, and traders start to sell in anticipation of warmer springtime temperatures leading to less demand for natural gas.

That’s what happened last year – when UNG rallied 40% in August, and then gave back all those gains by the end of November. That’s also what happened in 2019 when UNG rallied 20% in the first half of September, and then erased the entire rally in the second half of the month.

The price of natural gas is more overbought now than it was during this time last year and the year before – just before the rally ended and the price turned lower.

Lots of folks are betting UNG goes even higher from here as we head towards winter.

Based on history, though, I think I have to take the other side of that bet.

Best regards and good trading,

Jeff Clark,
Editor, Market Minute