SentimenTrader ---- Its time to keep an eye on copper and natural gas

 Key points

• Seasonality is not a roadmap to what "will" happen but rather simply an average of what has happened in the past
• That said, when price action and seasonality align, significant opportunities often arise
• Two of the world's most important commodities (copper and natural gas) are entering periods that demand investor's attention - one in a favorable way, one in the opposite

Copper weakly enters an unfavorable seasonal period

Copper topped out in May 2024 and has since declined almost 20% in value. At the moment, copper futures are trading below their 70-day exponential moving average (the red line in the chart below). 

The chart below displays the annual seasonal trend for copper.

Note that an unfavorable period extends from Trading Day of Year (TDY) # 172 through TDY #191. For 2024, that period extends from the close on 2024-09-03 through 2024-09-30.

Also, note that September and October have historically been the two weakest months of the year for copper.

The chart below displays the hypothetical cumulative $ +(-) achieved by holding a long position in copper futures only during the TDY #172 to #191 period since 1959. 

It is worth noting that this period showed a slight if highly inconsistent, net gain into the early 1990s. Since then, it has skewed heavily to the negative side.

The table below summarizes copper performance during this period. 

Natural gas points the other way

Whereas copper has historically skewed negatively during the early fall, natural gas has tended to do the opposite. In the monthly chart below, we see the effect of fracking on the price of natural gas. The sheer abundance of natural gas produced via fracking has resulted in sharply lower prices. 

If we zoom in on more recent price action, we see that Natty has moved back above its 70-day exponential moving average. 

Of course, with a volatile market, there is no guarantee that the favorable price action will continue. However, when assessing seasonality, it is preferable when price action and seasonality align. For now, that is the case for natural gas.

The chart below displays the annual seasonal trend for natural gas.

Note that a favorable period extends from Trading Day of Year (TDY) # 172 through TDY #198. For 2024, that period extends through the close on 2024-10-04.

Also note that, historically, September and October have been the two strongest months of the year for natural gas.

The chart below displays the hypothetical cumulative $ +(-) achieved by holding a long position in natural gas futures only during the TDY #172 to #198 period since 1990.

The chart above shows that as natural gas prices have been much lower in recent years, the favorable nature of the early fall season has leveled off to some degree. For the moment, the combination of favorable seasonality and a favorable price trend may offer an opportunity. Note also that the sharp plunge in 2022 reminds us that the purported reliability of any seasonal trend never relieves a trader of the responsibility to manage each trade and to consider potential stop-loss actions.

The table below summarizes copper performance during this period. 

What the research tells us…

Seasonality is best used not as a standalone tool to tell you precisely when to enter or exit a trade but as a guide to tell you "When to look where, and in which direction." Best results typically occur when seasonality is confirmed by actual price action trending in the expected direction. With copper in an objective price downtrend, seasonality suggests that traders focus on playing the short side (or at least eschewing the long side). Conversely, as long as natural gas can hold its latest price uptrend, seasonality suggests that traders focus on playing the long side (or at least eschewing the short side).