The Nordpool electricity market has a daily spot price and a Forward market price. The spot price shows the daily price, and the forward market is for companies that want to hedge. There is a difference between spot prices, 2013 prices and 2014 prices, which is why we are showing each type separately. Hedging recommendation (updated ad hoc)Prices are now below the short moving average. This is something we have already warned would happen in an ABC movement. It is now up to your risk and hedging profile whether you want to stop your previous hedge (and restart it if we get the final increase into wave C) or whether you want to keep your hedge. At the beginning to the hedge we did in fact say: "Whenever we start a hedging there is always a risk that it turns out to be a false signal. In that case we should be ready to stop the financial hedge again if prices break below the short moving average on a weekly base". But so far we have no reason to doubt the buy signal, especially because the spot market price is also increasing. Naturally it is your risk and hedging profile that determines the start and lenght of your hedge. Please read the short term section and the medium term section in order to get an overview of how the increase may progress. Especially the ABC structure can - if it turns out that way - make you doubt your hedging at some point (at the B low). Since the forward is a financial contract we can start it without contemplating too much on the ending point, but just leave the contract intact until we get a signal that the increase has peaked. Hedging history:
January 2012: Start a short term hedge, lasting 2-5 months. Fundamental Analysis Electricity Forward 2014 is a financial instrument. Please see "Electricity Spot" for the fundamental analysis on the Electricity market. | Technical Analysis (updated weekly)Short term (0-5 months):
We
have just seen a "false signal". Prices broke above the short moving
average for almost two weeks, and now prices are crossing below again.
This is a false buy-signal, and this means that we cannot keep the arrow
as red any more. So we are now changing the arrow to yellow, and this
is an indication that we should not initiate any further hedging. The
real question is whether we should stop the hedging we made when the
price broke above the moving average. This is not certain. All evidence
points to a scenario where this is, indeed, a short term price increase
(but just short term like we have advised all along). Basically the
current price decline is something we have already warned would happen
as an ABC move: The rough idea was something like this: "The first
increase of A could reach up
into the 42-43 EUR area (ps. it hit above 42 EUR). Then we could very
well see a quite deep
retracement down to B of roughly 40-41 EUR (so far just reaching below
41 EUR). Then we can see the start of
the final increase up to the C top of roughly 44-46 EUR". So basically
the price pattern is following this ABC movement that we described at
the beginning of the increase. Of course there is no guarantee that this
pattern will continue, but if this scenario
is right then prices should stop falling again soon, roughly at the 40-41 EUR level and increase again, breaking above the short moving
average and begin a few month of increase. This would be a likely
outcome. But this is just a "scenario" or anticipation as long as prices
are below the short moving average. Whether you want to keep your hedge
and wait for this possible scenario, or whether you want to terminate
your hedge now (and then restart it if we see a break above the short
moving average) is your decision. Your risk and hedging profile should
be the ruler of this. In the meantime we keep the arrow as yellow, and
only when we change it to green do we have a strong advice to stop the
hedge. How does all of this look from a risk perspective? Prices are
roughly at 41 EUR now. Since the peak at 50 EUR we have advised to avoid
all hedging because we forecasted a huge decline - which we have seen
perfectly. Now when prices are at 40 EUR the risk is very much reduced.
Naturally prices can continue to fall further, but the downside is
limited based on 40 EUR and based on the very low RSI in the big graph
(below 20). So in a risk perspective the current level is suitable as a
low risk entry. But we will follow the development during the next weeks
to see whether our anticipation is right or whether we should stop our
previous hedging.
During the past month we have warned that a new
short term price increase should be starting soon: "Despite the nice
downtrend coming along as forecasted we should start to anticipate a
short, upward correction. The RSI in the small and the big graph is at a
very low level, and this means that it would be easy to see a short
term increase starting some time in Q1. We do not know exactly when the
low is in place, but it could be roughly in February". Even though
prices are below the short moving average at present we find it quite
possible that we have seen the final low on 17. January at 40 EUR.
Whenever prices are increasing we need to get an idea of how long prices may increase. Naturally we can never give a precise measurement of this, but we can give some calculations and anticipations to base your decision on. Already before reaching the low of 40 EUR we forecasted: "In Q1 we expect a short term increase, perhaps lasting a few months". The quick view is that we expect prices to increase roughly 2-3 months to 44-46 EUR. We will not get both timing and price target right, but these are our current targets. In the medium term section we have aimed for a final low to be reached "before May 2012", and this increases the odds that we have now reached the low. Below is a more detailed description of the increase we expect.
The price target we could be looking at is a low target of 44 EUR and a medium target of 46 EUR. We anticipate that this is going to be a short term increase, and the duration of this is normally 1-5 months. However, please read the medium term section, because there is a risk that this is not only a short term increase but also a medium term increase. But until shown otherwise we currently anticipate either a 2 or a 3 months increase starting from late January 2012, but anything in the 1-5 month region is fine. We anticipate that the increase will not go in a straight line, but instead make an ABC-structure. We cannot give any measurements to these ABC moves, but a rough idea could be something like this: The first increase of A could reach up into the 42-43 EUR area. Then we could very well see a quite deep retracement down to B of roughly 40-41 EUR. Then we can see the start of the final increase up to the C top of roughly 44-46 EUR. There are higher targets than this, but so far the likelihood is smaller, and so we do not need to go into this now. This whole ABC structure could then last 2-3 months until the final C top. This is just a rough anticipation for now and we will put more details on once we get more signals.
Medium term (6-12 months):
Prices are in a medium term downtrend. This usually last 6-12 months, counting from the peak on 2. May 2011. A medium term downtrend will have a low in the time frame between November 2011 and May 2012. In this time frame we can see the start of either a short or a medium term uptrend. We are starting to see an increase now (discussed in the short term section). This could be either short or medium term, and we cannot dismiss the medium term increase of 6-12 months, only point out that it is less likely than a short term increase of 1-5 months.
Major trend (1-3+ years):
The major trend arrow is shown as green because prices are below the long moving average. The implication of all this is that electrity is in a downtrend since the peak in May 2011. This kind of downtrends last 1-3 years, but usually a bit shorter for electricity. So we expect something like a 1-2 year downtrend from May 2011.
Recently the RSI (in the big graph) reached 20. We said: "This is a low level, and we actually expect some increase to start. We cannot give a date yet, but this acts as an early warning". We are now seeing some price increase, and we deal with this step by step in the short term section. But here in the major trend section the major downtrend is still intact as long as the price remains below the long moving average. Business Cycle analysisElectricity Forward 2014 is a financial instrument. Please see "Electricity Spot" for the Business Cycle analysis on the Electricity market. |