Technical Analysis of the Natural Gas Market

EconMatters's picture

By EconMatters  



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. 



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Jack Sheet's picture

You are wasting everybody's time by pretending that technical analysis can predict future prices.

trebuchet's picture

And you have no idea how to interpret articles like these. 


Good to still see people using terms like "price discovery"


disabledvet's picture

and remember...when you waltz on in there to "take it to the man"'s the man:
that...ahem..."guy" a massive CONSUMER of natural on a scale that makes your home heating bill look exactly as it is: a dot "on the screen of death." he has a balance sheet to play with, he's got a stock price that has done nothing but go up ten years running, it's now up to "ten billion" and when he see's you "he thinks twenty." in short DO NOT TRADE NATURAL GAS FUTURES EITHER. that game is designed, built and EXECUTED to crush me and you and "econ minister" here. "and it works without fail." collecting from the rate payers is still a bitch of course....but once you and i print our own solar panels THEN we start "taking it to the man." and yes..."even that's do-able now." TURN OFF THE TELEVISION AND GET IN THE REAL GAME. yank junior OUT of the school system. it's time to start producing for "You Incorporated."
or how about this guy:
don't know why i have an affinity for such a snotty no-it-all (is it know it all?) type...but hey, "it's the friggin' internet. everyone is always smarter than everyone else." folks need to immerse themselves in the INNOVATION game...cuz THIS is where the action is "not in going long oil forever cuz i've got you by the balls." (as XOM goes literally bets the industry on natural gas ironically enough.) when i look at a equity that did nothing for a decade and now is "going to the moon" relative to its stock me an idiot PLEASE because i look at that and say "it's time to play stupid and imagine these guys really are going to the moon with a three dimensional printer...and nothing else." there's a world of wonder out there folks....i pray to fall back into that world one day. My days of being part of the "applied experimental weapons unit" are now long behind me tho. "and all that did was successfully invaded and conquer Baghdad in less than a month." hmmmmmm. "and what were they were working on" you ask. "what were THEY working on" indeed...

the grateful unemployed's picture

i heard the same shit about Chesapeake. subsidized by bernankes easy money they continue to plow worthless fed dollars into the ground and over produce, but eventually the btu value trap catches up with them. but in fairness $50 a bbl oil is the next stop, as ALL ASSETS move together as one, including housing, but one brick in the wall, (well you know the old wall street saying about rallies which grow exceedingly narrow) and natgas just has less of an airpocket underneath, and some right thinking political asshole (not the one we have) we see it as energy independence. in the meantime the arab spring means CHEAPER OIL, as the muslim brohood sells what they have to feed the people. and that is NOT WHAT OBAMA/BERNANKE WANT. they want to keep the fat bankers on easy street. simple men for simple times.

adr's picture

At $4.00 it will cost a consumer between $5.85 and $6.50 per mcf for gas. Hello $200+ heating bills. Go long sweaters and down comforters.

That is if consumers actually matter.

A natural price for nat gas is in the $2.50-$2.75 range.

the grateful unemployed's picture

whats the (official) elliottwave count? i see 5 on the upside from the bottom, and 2 on the pullback, which makes this wave 3, the longest, as long as support holds, and if you don't like elliott the last week looks like a reverse head and shoulders. on the fundamentals the energy sector is strong (or my service station is gouging me) all i want is parity on BTU basis with the rest of the sector.

Kayman's picture

Natual gas is being used to produce oil in the oil sands. Ergo, the lower the price of nat gas, the more profitable it is for some oil companies.

FreeMktFisherMN's picture

I am tempted at times to get in, but it just goes up and down within the range. Last inventory report I bought the second it came across Bloomberg below 'expectations' and it got a bump, and made a quick .5% on UGAZ before luckily getting out, as it sold off then. Thought there might be one more bull run with winter staying cold in midwest. Still might. Am interested in coffee market if some bottoming can occur.