Trader’s Narrative

Amaranth Advisor’s spectacular implosion has been all over the major newspapers, business tv and countless blogs so I won’t rehash the story of how a supposedly ‘hedged’ fund made a tragic bet on natural gas and kept doubling down. We’ve all seen this classic pattern accompany each and every historic blow-up.

But for me the most interesting aspect of Amaranth’s story is that it could very well be a tell for the Natural Gas market. If your memory stretches that far, think back to the late 90’s when TMT was all the rage and everyone and their puppy wanted to get in on that ’space’. But over in the dank and dark corner of gold stocks and dedicated bear mutual funds managers were busy closing shop.

I’ve been bullish on natural gas for a while now but it hasn’t worked out really. And in case you’re wondering, I’m still bullish. I suspect that Amaranth’s exit from the energy arena is a tell that natural gas will find support here and retrace some of its decline.

Because it’s dangerous to go against the trend I would not play this with Natural Gas futures itself. It’s way too volatile. Instead I would go for an equity proxy like natural gas stocks or Canadian energy trusts that are heavily weighted towards NG.

Since the Katrina induced highs of last year, natural gas has been crushed to around $6:

Eventhough I don’t think it will be returning to its highs of last year anytime soon, there is a good chance that natural gas has found strong support here. The COT report would tend to agree with that: the small speculators have cut down on their long positons and the commercials have reduced their short positions.

As well, gas related equities have been forming bullish chart formations (the most common being double bottoms). Take a look at a Canadian natural gas trust:

Notice that the March bottom in natural gas was at a higher level than the one being carved right now, but Shiningbank is now trading higher than its March intermediate low. Among the other Canadian trusts, take a look at Esprit (EEE.un), Peyto (PEY.un), Paramount (PMT.un), Trilogy (TET.un), and Focus (FET.un). On the US side, among others, check out NGS and NGAS.