Poor natural gas bulls. The general public has been patiently bullish on natty for years now, with the kind of fervor that makes you hear unsolicited “buy natural gas” tips from taxi cab drivers in local diners.

(That actually happened to me, when a guy at the counter found out I was a trader.)

Thing is, the actual performance of natty has sucked like an electrolux — nearly cut in half over the past year. We’ve got natural gas coming out our ears, thanks to the miracle of shale.

But natty bulls have been getting all hot and bothered this week, as a result of serial over-producer Chesapeake throwing in the towel. Via WSJ:

Taking a drastic step to stem a glut of natural gas that has pushed prices down 45% in the last year, the nation’s second-largest producer said it will slash gas drilling by nearly half.

The move is an abrupt turnabout by Chesapeake Energy Corp., which calls itself “America’s Champion of Natural Gas” and helped pioneer drilling techniques that have opened up swaths of the U.S. to energy produced from shale rock. So much gas-rich shale has been found, however, that federal and private forecasters predict an oversupply will last for years.

Time to load up on natty? Some traders think so. Open interest on natural gas ETF call options has broken a one-year high, and someone put on a very big call spread on Tuesday (betting that the natural gas price will climb substantially higher by March).

Natural gas did make a whopper of a move — nearly 8% — after the Chesapeake announcement. But the backdrop feels sketchy. When oil put in its historic bottom near ten bucks a barrel in 1999, the mainstream media was calling for it to go to $5. IThe Economist featured an infamous cover (which I have framed) that read “Drowning in oil.” In other words, bearishness was at an extreme when oil bottomed. You certainly didn’t have Joe Sixpack salivating.

This natty spike, in contrast, is maybe the most anticipated start to a hoped-for (and much delayed) bull market in commodity history.

And check out how it registers (or rather doesn’t register) on the weekly chart:

Real bullish eh? That ain’t what bottoms are made of… sadly the charts for Chesapeake (CHK) and the Revere Natural Gas Trust ETF (FCG) don’t look much healthier. The much loved shale producers have been hammered by the ongoing gas glut.

My instinct in looking at the spike (in both CHK and natural gas itself) is to ask 1) how much of it was due to short covering, and 2) what kind of firepower do the bulls have?

Large volume events often mark the beginning and ending of moves, but in this case the volume tell is skewed by the prevailing bullish sentiment for gas on the retail side.

If we get a winter weather cold snap, more bullish excitement could provoke a further squeeze — as could a crude oil conflagration due to Middle East tensions. But those are a gambler’s hope and I’d be inclined to stay away… too many bullish eyes salivating over natty here.

A further run-up to short-term overbought levels might invite shorting opportunity on vulnerable producers with ugly charts.

JS