How to Trade a Rise in Natural Gas Prices

NEW YORK ( TheStreet) -- I am seeing a potential buying opportunity today in what has been one of the biggest dogs over the past couple of years: good old natural gas. Or as we in the industry like to call it: the widowmaker.

Bearish fundamentals have beaten this market to a pulp. After all, our supplies of natural gas are at extremely high levels, enough to sustain the country for quite some time.

Looking to this week's inventory report, supplies probably rose 37 billion to 39 billion cubic feet, which sounds like a lot, though the five-year average build has been about 60 billion cubic feet.

While I do think that this market may have some more near-term upside, I do not think we will see the "big pop" in nat gas prices a lot of analysts have been calling for until the gigantic production backlog is mopped up.

One way to gauge a commodity's bullishness or bearishness is simply to look at companies that produce that commodity. In this case, one can look at natural gas producers Chesapeake Energy ( CHK), Devon Energy ( DVN) or Encana ( ECA). Looking at these charts, I do not see too much to get excited about at this point. When supply is absorbed, however, I think we will see these issues trending higher, and that could be a great clue to building a longer-term position in natural gas.

In the near term, nat gas has traded higher in the past four sessions after putting in a swing low at 2.61 a week ago. The market is trying to turn up on a weekly chart with both the 20- and 50-day exponential moving averages (EMA) going horizontally. Still, the market is trading above the 20. On the daily chart, the market is close to turning higher, with the market now trading above the 20-day EMA but currently below the 50.

I think a short term buy here on a pullback to the 20-day EMA is worth a shot because it is a clear-cut signal. If wrong, it will be seen right away, and therefore a tight stop may be used.

If you are bullish on nat gas over the next few days, here is one way to play some potential upside. As always, if futures are not your thing, feel free to contact me to discuss other ways and instruments (such as options) to structure a bullish position. This information is based on the most recent data as of today, Sept. 5.

Buy 1 October natural gas futures at 2.81 or better.

Place a protective stop at 2.76 good until cancelled.

Target 3.00 or higher.

Stop may be trailed based on an individual's risk tolerance and money management preferences.

Risk on trade: As stated above, $545 including a $45 R/T commission inclusive of all fees.

Profit potential: theoretically unlimited to the upside. If target stated above is reached, profit would be $1,855 after subtracting a $45 R/T commission inclusive of all fees.

A mini contract may be used. In that case, amounts would be one quarter of those stated above.

Please note: Futures and options trading is inherently risky and isn't suitable for all investors. Past performance isn't indicative of future results. Stop-loss orders meant to limit losses may not be effective because market conditions may make it impossible to execute such orders.
Matt Zeman is a trader at Kingsview Financial. He began his trading career as a runner in the grain pits at the Chicago Board of Trade before becoming an arbitrage clerk. Eventually he started trading equity options and stocks. Matt now is a full-time futures broker. He has been a frequent guest on CNBC, Fox and Bloomberg, and provides his views on the stock, bond and futures markets for financial media including Dow Jones, the L.A. Times and The Associated Press. Matt is a member of the Chicago Board of Trade, and carries series 3, 7 and 66 licenses.