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Natural Gas Warns Lower

07/16/04 08:41:58 AM
by David Penn

Deep MACDH troughs point to lower prices ahead for December natural gas.

Security:   NGZ4
Position:   N/A

In recent Advantage articles, I've hinted at the bearish prospects for the energy complex ("Crude Warns Lower," June 7, 2004; "Heating Oil's Diamond Top", June 29, 2004). While I was cautious not to suggest that any collapses were imminent, I did underscore the fact that the deep MACDH troughs formed by all four of the main energy complex commodities (crude oil, heating oil, unleaded gasoline and natural gas) during their simultaneous corrections in June were harbingers of lower prices.

Nevertheless, I repeatedly warned that rallies after such deep troughs are common--even if these rallies prove to be ultimately sellable rallies. For example, in the crude oil article mentioned above, I said that "The deep MACDH trough in early June suggests a powerful bounce, and perhaps an even more powerful correction afterward." In the case of heating oil, I wrote that a diamond top appeared to be the dominant technical portrait in the commodity. Still, however I provided both upside and downside objectives approximately six points beyond the top and bottom of the pattern, respectively.

If December natural gas enters a bear market, then this series of deep MACDH troughs in the summer of 2004 will likely mark the turn.
Graphic provided by: Prophet Financial Systems, Inc.
Please don't mistake this for an excursion into CYA ("Cover Your, er, Posterior") analysis. I have paid a great deal of attention to MACDH troughs of late (as a number of articles in Advantage and attest), and one of the major characteristics of these troughs is the sort of "powerful bounce" I warned of back in June with regard to crude oil.

So it is that I come to you with another MACDH trough in the energy complex--this time in natural gas futures. Unlike the heating oil and unleaded gasoline, natural gas futures have yet to make a new contract high--at least not in the December contract (neither has December crude, for that matter).

This opens up the possibility that the new highs in heating oil and unleaded gasoline are fake-outs or bull traps. I don't want to overstate that case: new highs are new highs and a print in December crude at 40.40 or so on Thursday the 15th would be bullish, as would a print at 115.20 or so in December unleaded gasoline and a print at 114.50 or so in December heating oil.

But I don't think the MACDH troughs are worth ignoring. If the energies reverse to finish the week, or if swing-oriented long plays in the energies turn up losers after the first day or two, then the likelihood that the group has topped will be great. Note that not only has December natural gas has not only failed to set a new high vis-a-vis May, but also that in June and July, NGZ4 has established consecutively lower monthly peaks. If natural gas breaks down from these levels, then it will be hard not to fear that the same--or something similar--might happen to natural gas' cohorts in the energy complex.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine,, and Advantage.

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