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Is Natural Gas Ready For A Bounce?

08/10/04 10:44:42 AM
by Kevin Hopson

Natural gas has corrected significantly since the May high but prices could be due for a bounce in the near-term.

Security:   $NATGAS
Position:   N/A

The last time I touched on natural gas, I said that prices were entering a significant point in time, as a long-term downtrend line and a long-term uptrend line were both converging in the $6.00 to $7.00 range. A break above the $7.00 level would be bullish, while a break below the $6.00 level would be bearish. As you can see in the one-year chart, prices eventually broke to the downside, turning the technicals bearish.

However, if you take a closer look, natural gas prices could see a bounce in the near-term. Notice how prices previously found support around the $5.85 level, the site of the black median line. Natural gas had traded above this median line for over three months and the break of support here was a sign of further weakness. However, the top blue parallel line has been acting as support since the mid-June pullback and prices bounced off this trendline on August 9th. Additionally, April's upside gap ($5.65-$5.85) was filled upon the recent test of the top blue parallel line. Once gaps are filled, prices tend to move in the direction of the original gap - which in this case is up.

Graphic provided by:
The option open interest shows further support for a potential bounce. The September $5.50 strike price has the most amount of put open interest out of any front-month contract, and there are 7,737 put contracts at this strike price and only 2,115 call contracts (5,622 net put position). Since option activity tends to be a contrarian indicator, as sellers of put options will have incentive to keep prices above the related strike price (and vice-versa), natural gas should find significant support around the $5.50 level. If not, the build-up of put open interest at this strike price could work in reverse and lead to panic selling. As a result, I would keep a close eye on the $5.50 level in the near-term.

Kevin Hopson

Kevin has been a technical analyst for roughly 10 years now. Previously, Kevin owned his own business and acted as a registered investment advisor, specializing in energy. He was also a freelance oil analyst for Orient Trading Co., a commodity futures trading firm in Japan. Kevin is currently a freelance writer.

Glen Allen, VA
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