Yes, we are still Metal Augmentor but why then are we seemingly so obsessed with natural gas that we would devote yet another analysis to its speculative merits or lack thereof? It’s simply because natural gas is one of a few markets — along with the precious metals and a select few commodities — that can offer a once-in-a-lifetime trading opportunity every 3 or 4 years!
Indeed, we have “stalked” natural gas for several years for this very reason and at some point we expect to be amply rewarded for the persistence if not patience. Based on the below technical update, our preference is to wait just a bit longer for further confirmation of a bottom before getting involved in any serious way for now — although we are already holding a minimal number of NYMEX Natural Gas call options just in case. Should the technical conditions flash green, we are fully prepared to deploy some serious speculative capital and we will try to discuss some of the possibilities for interested subscribers.
So without further ado, let’s take a look at this timely and exclusive technical update on natural gas from Eidetic Research.
August 30, 2011
The monthly continuation chart of Natural Gas, above, shows prices locked in a mostly horizontal range that has persisted for over a year. Most of the trading during that time has been between $3.75 and $5.00 basis spot month NYMEX. The monthly stochastic oscillator, while presently down sloping, is in neutral territory around 50 and reflects the ongoing price range. There is little to be gleaned from this chart but the weekly continuation chart, below, is more informative.
Our simple pattern interpretation of the weekly chart is that an extended “V” bottom, a prelude to a reversal of the overriding long-term down trend, may be unfolding. The schematic above the chart is self-explanatory: compare it with price action since the 2009 low. Doing that, we see that prices are currently in the potential bottom’s extension phase, which is an approximate down channel (drawn through weekly closing levels). Channel boundaries are presently at about $4.40 and $2.65 and spot month last traded at $3.909.
In addition to the simple pattern recognition that we have applied, weekly ADX and stochastic oscillator readings are shown. The 10-period ADX is presently flat at 19. Generally, a rising ADX that is above 20 is indicative of a market that has started to trend. Therefore, we are watching the ADX for a demonstrated rise that would occur with any potential near-term price strength. The 14-period weekly stochastic oscillator is declining. Although no bullish divergence is evident, the absolute low level of the oscillator (slow %D = 14.8) implies that a period of upside price response could be pending.
The chart above is a daily continuation chart of NYMEX natural gas that dates from May 2010. There are 3 notable points that we see at this time. First is an open continuation chart rollover gap that was created in October 2010. The gap is between $3.6560 and 3.2920. Second, prices have spent approximately 10 months in a horizontal range between the illustrated red lines that represent resistance just above $4.85 and support around $3.75 that is also just above the rollover gap. Third, July – August price weakness moved the daily 9-period stochastic indicator below 20 in early August, indicating an “oversold” near-term momentum condition. Since then prices have been flat-to-lower, eking out new low closes on August 18 and again yesterday August 29. Despite the new price lows, note where the 9-period daily stochastic indicator readings are: flat within the 30 – 40 area and thus showing a bullish divergence. So far price action has not responded to that constructive divergence setup.
On August 5, 2011, we wrote the following about the natural gas market:
Given that the natural gas market often establishes August – September price lows, we are watching the market for signs of such this year. Ideally, we would like to see the current short-term down leg probe into the rollover gap, even if only marginally. However, the market’s current “”oversold” momentum condition in conjunction with price proximity to trading range support may result in an August – September low that is above the gap.
The first indication of a tentative low would be any one-day bottom reversal range in the $3.75 area basis front month NYMEX futures.
Trading today featured a new low ($3.78 basis front month NYMEX futures) in the ongoing downleg that dates from early June. Prices failed to hold their losses and finished at $3.909, thus establishing a one-day bottom reversal from just above $3.75. No significant overhead chart levels or moving average lines were violated.
In the context of a negative monthly and weekly momentum backdrop along with price action itself confined to a 3-month down trend, today’s bottom reversal action does not yet amount to much. However, the 20-day Bollinger band envelope (not pictured) is about as tight as it has been since March 2011 when the market embarked on a rally to the resistance zone and the 20-day moving average is at about $3.95. The narrow Bollinger envelope and price proximity to the Bollinger moving average plus the positive daily momentum backdrop implies potential for another rally attempt. A close above $3.95 in the next few sessions would be the first indication of that and a close above the most recent minor resistance point at $4.029 would strengthen the case for a sustained price rally.
We would need to see the front month futures close above $4.25 to shift from a near-term defensive outlook to a more neutral/positive one. If renewed selling pressure undercuts today’s $3.78 reversal low then we would expect to see the continuation chart gap mostly filled as the market attempts to establish a seasonal low in September.
We currently own shares or positions in the instruments discussed herein. We have not been compensated by any party for this commentary. Options are particularly risky as you can lose your entire “investment”. Therefore, only buy options with money you can afford to lose and not lose sleep over. This is not investment advice, which you should seek from an investment advisor or licensed broker.
This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any commodity, futures contract, or option contract. Although the statements of facts in this report have been obtained from and are based upon sources that are believed to be reliable, we do not guarantee their accuracy and any such information may be incomplete or condensed. We do not assume responsibility for typographical or clerical errors in this report. All opinions included in this report are as of the date of this report and are subject to change without notice. Employees of Eidetic Research may hold positions in futures or cash markets that are either in accordance with, or contrary to, stated conclusions within this report.