US News & World Report: Contango vs. Backwardation: What's the Difference?

By Marc Guberti,  01/12/2024

Traders use various technical indicators to predict how markets and individual stocks will move within the next few days, hours, minutes and seconds. While using one technical indicator is a good starting point, the best traders use several technical indicators before making trading decisions.

Contango and backwardation are two technical indicators that act as opposites. These indicators can tip traders off on the market's sentiment. Bullish indicators, such as contango, can present short-term buying opportunities. Bearish indicators, like backwardation, may give traders a small window to sell some of their positions before the rest of the market notices a shift.

What Is Backwardation?

Backwardation is contango's opposite. This technical indicator is a bearish signal that tells traders that it may be a good idea to sell an asset at its spot price. The spot price will trade higher than the futures price. This trend indicates that traders do not feel confident about an asset's short-term performance.

Justin Zacks, vice president of strategy at Moomoo Technologies, explains how changes to supply and demand can result in backwardation with a few commodities examples: "Backwardation is often caused by a short-term shortage in supply or spike in demand for a commodity. For instance, a cold-weather snap might increase the immediate demand for natural gas, leading to backwardation. Or a group of suppliers, like OPEC+, could temporarily limit the supply of oil, causing a jump in the spot price above futures prices."

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