Natural Gas Drops 8% in Minutes

Something interesting happened Wednesday night. Around 7:40, natural gas spiked downward in price, falling roughly 8% within minutes. By 7:50, natural gas had rallied back to trade within its normal trading range.

Was this just another example of electronic trading messing with the system? Or is there something else going on here?

Flash crashes have happened on numerous occasions in the past, most famously in May 2010 when the Dow plummeted nearly 10% in a matter of minutes.

Perhaps there is a fundamental story here. On Thursday, natural gas declined in price when a government report showed that inventories of the hydrocarbon rose more than anticipated, according to The Wall Street Journal. Was there a trader aware of the situation last night?

The rise in the inventory of natural gas might be just another sign that the U.S. economic recovery is faltering. If that is the case, it could be bullish for the U.S. dollar.

Alternatively, it might just be that the hype for natural gas pushed by people like Jim Cramer and T. Boone Pickens is just that—hype.

Action Items

Bullish: Traders who believe that natural gas is due for a rebound might want to consider the following trades:

• Buy United States Natural Gas Fund (NYSE: UNG). UNG is a simple long play on natural gas. If the price of natural gas increases, UNG may rally.
• Buy ProShares UltraPro Dow30 (NYSE: UDOW). A leveraged long play on the Dow. If natural gas rallies, it may be indicative of an economic recovery, which might rally the Dow.

Bearish: Traders who believe that natural gas is an overrated commodity may consider taking positions in the following:

• PowerShares DB US Dollar Bullish Index (NYSE: UUP). UUP is a long play on the U.S. dollar. If natural gas continues to fall in price due to a fall in demand, the dollar may benefit as a safe haven play.
• ProShares Short Oil & Gas (NYSE: DDG) is a pure short play on natural gas. DDG may rally if natural gas continues to decline in price.

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