Mid-December, the prices of natural gas started to fall. The continuous contract of natural gas on the Multi Commodity Exchange (MCX) declined after facing a barrier at around ₹580. The sell trend gained considerable momentum result of which the price of the futures contract slipped below the ₹400 mark last week.

The cumulative Open Interest (OI) of natural gas futures on the MCX shot up to 32,710 contracts as on January 4. In comparison, it stood at 8,705 contracts on December 16. This shows the magnitude of the short build-up that happened during this period.

The January futures, currently trading at ₹344, are trading in a crucial price band of ₹330-360. Even then, there are no signs of the bears stopping their assault. Fresh shorts being built this week means the contract could drop below the support at ₹330 and head south to touch ₹275.

On the other hand, if the contract bounces from the current level, it will face a barrier of ₹400. Subsequent resistance is at ₹435.

Trade strategy

The continuous build-up in short means, traders should ideally consider fresh short positions. However, the support at ₹330 is a bit strong and this might help the bulls make some recovery, at least temporarily. That said, there are no indications of a bullish reversal either.

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Considering the above, we suggest staying out now. Initiate fresh shorts when natural gas futures drop below ₹330. Place stop-loss at ₹360 first and revise it down to ₹330 when the contract falls below ₹300.

Further, tighten the stop-loss to ₹305 when the price drops to ₹285. Exit the shorts at ₹275.

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