Pitchfork Analysis For Natural Gas

03/03/05 08:00:16 AM

by Kevin Hopson

Pitchforks have been accurate in predicting both breakout points and reversal points for natural gas prices.

Security: $NATGAS
Position: N/A

When I analyze a stock, commodity, exchange-traded fund, or any other kind of investment vehicle, I depend on a variety of technical tools. However, sometimes one tool is all you need, which I found to be the case with natural gas ($NATGAS). If you look at the two-year weekly chart for natural gas (Figure 1), you will note that pitchforks are today's theme. Though the chart may look complex, pitchforks have a way of making things simple.

For example, note how natural gas prices were stuck in the top half of the black pitchfork for the first nine months of 2004. When prices broke to the upside in late September, it was a significant long-term development. More specifically, when natural gas breached the top parallel line (around $6.30), prices rallied up to the $9.50 level in a matter of weeks. This rally was eventually halted at the 1A channel line, which is an extension of the green pitchfork. In other words, the distance between the green median line and the upper parallel line was added to the top of the pitchfork. This created another trading channel when the top parallel line was breached.

Figure 1: Natural gas. If you look at this two-year weekly chart for natural gas, you will note that pitchforks are today's theme.

Graphic provided by: StockCharts.com.

When natural gas reversed at the 1A channel line and proceeded to pull back, prices ultimately found support along the top black parallel line -- the same line that the contract overcame a few months earlier. As you probably know, prior resistance levels tend to act as support during pullbacks. As a result, it was no surprise that prices reversed here.

Since the first week of January 2005, prices had been consolidating between support and resistance. More specifically, prices were finding support along the red median line but were also encountering resistance along the blue and green median lines. However, note how these two median lines were recently overcome, and prices are now finding support along the green median line. As long as natural gas can stay above this median line (around $6.70), the short-term trend will remain positive. In addition, prices could make their way up to the $7.20 level, which is the site of the 38.2% retracement from the October-January decline and last December's high.

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.