Thursday

Nikkei Rallies To Catch Up and Natural Gas Contango Update

3 Comments September 24, 2009 – 1:15 am |   | Permalink |  Print This Post |

A week ago (17th September 2009) we wrote this:

the NIKKEI is still off its recent highs whilst every other market we follow have surged ahead. We opened $10/point Nikkei at 10340 overnight. expect this divergence to correct itself. Expect some great news from Japan (or some very bad news from the rest of the world - either way!). At the time of writing the NIKKEI is trading at 10350, with a target of at least 10500 (previous high).

The Nikkei opened strong today despite the Dow closing -81 points. The Nikkei is currently 10559, making a new high. Every dog will have its day, no where is it more true than in the markets. Japan showed no signs of life a week earlier, as we receive a few “unhappy” emails from readers (who I suspect got in the Nikkei with us) who were feeling the pain and disbelief as they watch other markets rally away whilst the Nikkei went down. We hope you are having a better day today. We will put a stop at our entrypoint at 10340 to avoid any nasty surprises just in case Dow is currently standing by the cliff edge ready to take the cataclysmic plunge. We do expect a significant plunge sometime, not just a one down day followed by further rallies. There should be a move whereby traders would “short on rallies” rather than the “buy on dip” mentality currently. India’s NIFTY showed some weakness yesterday, if it opens UP or no significant change, we will look to short at >5000 for $10/point(we did open a short yesterday at 5011 in our personal portfolio using our brand new iPhone, a worthwhile investment for traders). This should buffer our longs in the Nikkei. Whilst the 1% rally in the Nikkei is tempting us to take partial profits, we expect the Nikkei to power up quite significantly higher (or for the rest of the World especially India and Hong Kong to fall OR both). If global markets DO NOT roll over, we expect the Nikkei to outperform with a target of 11200-11700 ie about 10% (we will be taking profits and moving our stops up along the way). Should we be wrong (tails), our stops will protect us whilst our shorts have no stop at the moment. On a different note, the Natural Gas contango trade we made on the 4th September is slightly up (a few weeks grocery worth: our metric of P/L):

We also shorted the November Natural Gas contract at 3626 and longed the October contract at 2475 (a gap of $1.15 between the two contracts). This is a ridiculous contango, one that we cannot resist but to take the trade. $2/point, so if the entire gap 1150 closes up to zero, we will be up $2300.

The gap is now about $0.97 (thanks to the ridiculous spread our broker charges eating into our profits). Note our entry points shown in the screenshot below are different to the post above as we have been jumping in and out as the gap narrows/widens like an accordion. The gap at the time of writing is back UP, with the October contract expiring in 2 days (26th September 2009). This is in our honest opinion a low risk trade. Can the contango widen further? Sure, but the risk reward ratio is worth the trade. The only thing against the trade is the (#@$^) spread of 40 points each way (total 80 points = $160 loss as soon as you take the trade!). If you know of any brokers with a more competitive spread for natural gas, please let us know.

Natural Gas Contango Trade September 2009

We also disposed of 1000 units of JBH.AX at 19.09 (current price) to realise a loss of $120. This provision is made just in case manipulators decide to push it to take out the Barrier Put Warrants at $23. With 1000 units short averaged at $18.97 we will be down 4k - at which point we will be happy to short a further 1000 units at $23 to bring our average up to $21.