Natural gas futures on the MCX (Multi Commodity Exchange) has witnessed a sharp corrective rally over the past week. The nearest expiry i.e., November contract, after marking a low of ₹450.3 on September 21, rebounded quickly and is now trading around ₹520. This movement was in line with our expectations. In fact, there is also a chance for this move to extend up to the resistance at ₹550. Note that ₹525 itself is a considerable resistance.
So, we expect natural gas futures to resume the rally at the current level of ₹520 or after rallying to ₹550. Therefore, we suggest preferring short positions at this juncture.
A downtrend from here can drag the contract to the prior low of ₹450.3, or it could even fall to ₹400, a support level.
On the other hand, a breach of ₹550 can turn the trend bullish and that will open the door for a rally to ₹600, a resistance level. Subsequent resistance is at ₹650.
Trade strategy
Since our outlook is bearish, we suggested initiating shorts in three legs last week. That is, go short worth one-fourth of your total intended amount at ₹482. Add 50 per cent worth shorts of your amount at ₹525, and the remaining one-fourth when the price touches ₹550.
Traders who do not hold any positions right now can go short at the current level. That is, short worth three-fourth of the intended amount at the current level of ₹520, and for the remaining one-fourth when the price touches ₹550.
For short positions suggested above, the initial stop-loss can be at ₹600. When the price declines below ₹450, tighten the stop-loss to ₹475. Exit all your shorts at ₹400.