Technical Analysis of the Natural Gas Market
Near-term Double Top
Natural Gas closed Friday at $3.35 per mmBtu and has been on a three month downtrend from the $4 level where it put in a near-term double top in October and November of 2012.
This was your classic short setup, as NG bottomed in March of 2012 from the prolonged downtrend to test just how low prices could go, it then had to test the upside, where the top of the near-term range would be. This turned out to be an eight month process with a definable trend upward until the nice large number that $4 represents for resistance.
It couldn`t bust through this level, pulled back to previous resistance around $3.60, and made another run at breaking the $4 barrier, it failed putting in the classic double top, profits were taken and the shorts piled into the market, leading NG to break the $3.60 level and confirm the break of the uptrend channel.
Downtrend or Parallel Channel
Natural gas is technically still in a down trending channel if you draw a line from the top at $4 to the higher lows established at $3.67, and so on based upon the three month time frame.
However, if we look at the eleven month time frame Natural Gas has mainly been in a tight parallel trading range between $3.20 on the downside support and $3.60 upside resistance for the most part - with the exception of the three month dual try to continue the trend higher ( $3.60-$4.00).
So depending upon the time frame natural gas is either in a distinct downtrend channel or a parallel trading range.
Key Technical Support Levels
There is strong support at $3.20 as we basically have found it hard to close below this technical level for ten months. Therefore, any close below $3.20 would be significant and the shorts would take notice of this technical break. The next level of Support would be the round fat target of $3.00, and if this fails to hold then the momentum will gain, and $2.50 is possible.
This level of support should provide substantial incentive for buyers to step in on rigs shutting down production talk, but as we have seen before because some of the derivative products from the natural gas extraction process are highly profitable, production often continues at natural gas prices lower than otherwise profitable.
So the caveat here is that $1.90 is the last level of support that held after considerable effort to find that bottom. Ergo, it is conceivable that $2.50 could break, and the $2.00 level is in play all over again. I think it is a low percentage probability that we ever experience prices that low again as there was a lot of momentum on that move down to find the bottom.
However, one of the consequences of increased US oil production is that Natural Gas gets derivatively produced, and Oil prices are high; this results in more natural gas despite lower prices and the potential for Natural Gas only production rigs being shut-in.
Is the Natural Gas Market becoming “Intel Boring”?
The Natural Gas market loves to trend in channels that go on for months despite the fundamentals of the supply and demand equation. The market will be looking for a channel to cling to for a sustained run of 5, 7 and 11 months if possible. This is just how the commodity trades if at all possible.
But right now the economy is performing slightly better, there is increased manufacturing looking to take advantage of cheap Natural Gas, so I think the downside moves are limited. And regarding the upside, there is an over-abundance of supply, so until a robust export market comes into existence, prices to the upside seem capped as well.
As a result, the most likely outcome for Natural Gas is to stay in a relatively tight trading range between $3.00 and $4.00 for the bulk of the price discovery process.