Our models continue to see further downside in May 25 Natural Gas futures for the next several days. We see a lot of stops concentrated at 3.3 level in May25 futures - should the market break this level, the probability of an accelerated move to the downside increases significantly. Below 3.3, we also see significant stops at the 3.1 level; again, should the market break this level, the probability of an accelerated move to the downside is enhanced.

The best way to think of a key level with concentrated stops is as follows: Imagine a lake , in the dead of winter, covered with ice. Now - in your infinite wisdom, you decide to walk over and start jumping on the ice, without having any clue how thick the ice is (this may sound funny, but there are tons of people that go skating on frozen ice ponds all across North America only to later confirm what their tenth grade chemistry text had taught them, which is that ice is capable of cracking) . At first, the ice will start to crack - no harm, no foul as you are still standing on the ice. But if you keep jumping on this ice, eventually this same ice will completely crack, in which case your “downside” will be significant (i.e. you will plunge into the depths of the ice-cold water). The same is true for these key levels - the first test of these levels may not necessarily result in an accelerated downside, but you can bet that after a few successive tests the downside will be enormous.

Furthermore, we see the upside move on April 9th as a short-covering rally in a declining market, further confirming our short-term view of a market that has a rapidly deteriorating technical situation . The volume on this date was very strong (~360K contracts); in addition, the market rocketed higher immediately after the 9am EST open, both of which are technical signs of a panic short-covering move.

Our models alert us that: (a) short-term rallies have had a higher-than-normal probability of being sold aggressively since the March 9th high; (b) long positioning amongst speculators continues to decline; (c) offer sizes have been unusually large. All factors above lead us to the conclusion that systematic traders are still getting out of their long positions - without any clear end in sight as to when this long liquidation may end, we do not recommend initiating any long positions.

For those of you who are desperate to get long (it looks like there are quite a few of you!) - we recommend waiting until the market breaks 3.1. After observing the market reaction to this break, we can advise accordingly.

For those of you who want to get short (you’re in the minority!) - now is a great time to initiate a short position. Keep in mind that we do not see significant downside in the medium/long-term (3-6 months out) , only in the short-term.