Braving The Wild Natural Gas Ride (On The Long Side)

To anyone friendly to natural gas for the past five months, holding a long position certainly has been a challenge, and has been more akin to riding a bull on the PBR circuit.

Just to illustrate the bumpy ride, take a look at the 4-hour chart of the nat gas futures (NG) showing the price swings across a multi-month range carved out between 2.90 and 2.82 on the low side of the range, juxtaposed against resistance atop the range at 3.15 to 3.23. Within that range, over several months, there has been no significant change in the perceived fundamentals that indicate there is just too much natural gas around to lift prices consistently above 3.15 for any length of time, yet there is also an apparent perception that under 2.90, nat gas prices are relatively cheap. That said, the fundamentals might have much less to do with the development of the range than do algo traders alternatively fading near-term overbought conditions and then buying near term oversold conditions, which likely will persist until there is a market-shifting change in the fundamentals.

It is only when we overlay the nearer-term price swings on a longer-term weekly chart of nat gas that we can appreciate reasons for suffering within schizophrenic near-term price action. We can make a compelling case from anecdotal technical evidence that nat gas is nearing the completion of a second year of bottoming action at the tail end of a 14-year bear market that originated at 31.60 in 2003. None of the lower all-time lows after December 2015 have been confirmed by my momentum gauges, while the pattern carved out during the last 12 months has the right look of a falling wedge formation, which is often a pattern that anticipates longer-term downside price exhaustion ahead of a major upside price reversal.

Yes, the longer-term evidence remains anecdotal at this time, but the composite technical view of the nat gas market from 30,000 feet warns us that surprises likely will emerge on the upside well in advance of an obvious shift in the fundamentals, and that continuing to hold on for the wild ride should be rewarded in the weeks and months ahead.

See charts illustrating the technical pattern of nat gas futures (NG).

Mike Paulenoff is a veteran technical strategist and financial author, and host of MPTrader.com, a live trading room of his market analysis and stock trading alerts.