The price of natural gas has seen a sharp decline over the past week. Consequently, the December futures of the energy commodity on the Multi Commodity Exchange (MCX) fell from about ₹625 to the current level of ₹455, losing 27 per cent in just a week.
The contract is now below an important support at ₹475. While ₹425 is a minor support, the natural gas futures might fall below this level to touch ₹405, a strong support.
There has been heavy short build-up as we could see the cumulative Open Interest (OI) shooting up to 18,546 contracts on December 5 compared to 9,125 contracts on November 30 as the price declined. So, the likelihood of a drop is high.
There is also a chance for the contract to see a corrective rally to ₹520 from the current level before slipping below ₹425.
Trade strategy
Considering the above factors, traders can short MCX-Natural gas at the current level of ₹455. Add more shorts if the contract sees a rally to ₹520 since this up move is most likely to be a corrective one.
Place stop-loss at ₹550. When the contract falls and touches ₹425, move the stop-loss down to ₹470. Liquidate all the shorts at ₹405.