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NYMEX Natural Gas

05/20/04 10:21:21 AM
by Jason Braswell

Gas bottomed out at $5.06 a few months back and is currently trading in the mid $6 range. It looks like gas may have topped out, but where will it go?

Security:   NG
Position:   Sell

As you can see below on the pit daily continuation chart for NYMEX natural gas, prices have risen inside of an expanding triangle pattern since bottoming out in February at $5.06. Gas hit $6.53 last week on worries of the erupting crude market, testing the upper trendline of the pattern. Additionally, prices also tested the 61.8% retracement level for the move from $7.44 on January 9th down to the aforementioned low of $5.06 on February 24th. Combined with waning momentum, indicated by the overbought signal on the slow stochastic - I find that (14,3,3) parameters work well for this market - we're likely to see a test of the bottom trendline over the next couple of weeks, which should be down in the high $5 range.

Figure 1: Daily chart for NG.
Graphic provided by: CQG.
 
What happens when this support is tested? Will it break through or bounce off yet again? My guess is the former. First, trend resistance and trend support have been tested eight times now, which is a lot of activity for this pattern. Second, given that this pattern, an upward tilting expanding triangle, is generally bearish, I expect a break to the bottom. If prices bounce off of the floor yet again and return to the upper trendline, the likely peak of that move would be well beyond the 61.8% retracement zone and quite probably above the less often used 75% retracement level. In such an instance, I would be hard-pressed to view this move as a retracement.


Figure 2: Weekly chart for NG.

Measuring the width of the triangle from the point of the anticipated breakout gives about $0.70 of movement, implying a price target of about $5.10. Such a move means gas would settle below much longer-term support, shown clearly on the weekly chart. This could precipitate a far more substantial move down, and indeed, I expect prices to reach below the late 2003 low of $4.39 as part of a large downtrend, originating from the $10.10 high on February 25, 2003, sometime this summer.



Jason Braswell

Jason Braswell is the Director of Risk Management Services for Infinite Consulting, LLC. He attended graduate school for mathematics at the University of Florida in Gainesville and is an MTA affiliate.

Company: Infinite Consulting, LLC
Website: www.infiniteconsulting.org
E-mail address: jbraswell@infiniteconsulting.org

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