By Sara Nunnally, Editor, Smart Investing Daily, taipanpublishinggroup.com
After my adventure in Winter Wonderland without heat or water for 30 hours, I think I’ve become highly sensitive to energy news and investments.
That’s why, when I was catching up on some reading, I zeroed in on Michael Sankowski’s article from his service, Currency Profits Trader. Michael’s been applying technical analysis to the natural gas market — something after my own heart, as I used to bang the commodities drum when I teamed up with Adam Lass at WaveStrength a couple years ago.
But why would a currency expert talk about commodities?
It’s an extremely natural fit. Most commodities are priced in U.S. dollars. That’s why you see gold being used as a natural hedge against U.S. dollar fluctuations.
The power of combining expert knowledge of the currency markets with the increasingly dynamic commodity market makes for an amazing investment scenario. And to take it a step further, Michael has the economic acumen to really put his technical analysis into the bigger picture.
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Here’s what I mean… This is straight from Michael’s article:
The most recent tax data shows that daily tax revenue in November is up about 7% over last year, which is a huge increase. October was even more astonishing, up over 12%.
This economy is earning much more money than last year. This increase has been large over the past few months. Something happened in March of 2010 — and this economy took off.
Why is this increase in the amount of taxes collected important? Because tax receipts and GDP are very correlated. When more taxes are collected, it is an excellent sign of economic growth. When tax receipts fall dramatically, expect a recession.
Most currency traders in the market are all about “getting pips” — little tiny bits of gains on their positions; fragments of pieces of U.S. dollars, or euros, or British pounds. They don’t care about tax receipts. They are completely reactionary.
But if you’re talking about the long-term economic health of a country, then you can’t ignore these macro factors.
Same thing goes for currencies and commodities.
Again, from Michael’s article:
Most of the markets around the world have been involved in the currency market trade for all of 2010. Right now, the euro trade dominates nearly every other concern out there. The euro is the 800-pound gorilla of the trading world. Everybody is afraid it will default, go away, or maybe even solve all the problems, and all of this fear is refreshing.
Not many markets have been able to avoid the currency plays, but natural gas is one of them. Every other commodity in the world is near its highs, or in a rally, but natural gas is near multi-decade lows.
There have been huge discoveries of natural gas in unconventional places, and this has opened up much of the world for exploration and drilling. The U.S. always had lots of natural gas, but remarkably, the U.S. may have twice as much as we thought.
So you can understand why natural gas is in its own personal bear market — or at least it had been in a bear market. Natural gas is 20% off its lows and broke a trend line, plus a neckline of an inverted head-and-shoulders formation.
(By the way, investing doesn’t have to be complicated. Sign up for Smart Investing Daily and let me and my fellow editor Jared Levy simplify the market with our easy-to-understand articles.)
As Michael suggests, commodities and currencies are strongly linked. And currencies take their cue from overall economic health.
Everything is intertwined.
Including technical analysis. TA shouldn’t be removed from fundamental analysis — particularly when you’re talking about commodities. I learned this the hard way. A crude oil chart may show a bullish pattern with a high success rate, but if an inventory report comes out showing an unexpected rise in supply, oil prices will fall.
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Michael says, “I like trading commodities with technical patterns like this, but what I really like is the overall pattern of natural gas to spike in the winter. It doesn’t happen every year, but it seems like every other year, there is at least one month where there is a gigantic upswing in prices.”
Cyclical or seasonal trading is an easy way to combine technical analysis with strong real-world events.
But you also have to know the overall fundamental data behind a commodity’s price… and that means supply and demand.
While we have increased supply and capacity of natural gas, we could still face a cold winter. Natural gas has a tendency to spike.
It isn’t that we don’t have enough natural gas — we have plenty — but that we cannot deliver unlimited quantities next week. So you get these spikes in the price of natural gas if the winter is a bit colder than expected.
Due to the delivery constraints of natural gas, there is no easy way to increase the deliverable supply in a short amount of time. That’s why natural gas builds up supply all summer long to a huge level, and then draws this down over the winter.
After my adventure in well-below-freezing temperatures on Sunday and Monday, I’d have paid just about anything for natural gas.
As Michael explores commodity trading in his service, I’ll be following along to see just where natural gas is headed. I’m probably headed toward upgrading my heating system…
About the Author
Sara is Co-Editor of Smart Investing Daily. As Senior Research Director and global correspondent, Sara Nunnally’s diverse resume includes studies in art history, computer science and financial research. She has appeared on news media such as Forbes on Fox, Fox News Live, and CNBC’s Squawk Box, as well as numerous radio shows around the country.
As Senior Research Director, global correspondent and co-editor of Smart Investing Daily, Sara has traveled all over the world in search of the best investment opportunities to recommend to her readers, be they in developed economies like France and Italy, in emerging markets like the Czech Republic and Poland, or in frontier terrain like Vietnam and Morocco. Her unique “holistic” approach of boots-on-the-ground research has given her an edge in today’s financial marketplace as she searches for the next investment opportunities in hot sectors like alternative energy, currency markets and commodities.
