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Natural Gas Due For Another Bounce?

07/19/04 10:09:05 AM
by Jason Braswell

Natural gas just broke down out of a major pattern and looks ready to fall further, but key support is in the way. Can prices push through, or are they due for another bounce?

Security:   NG
Position:   Hold

Last time I looked at natural gas, I discussed several reasons why prices would likely break down out of the expanding triangle pattern evolving on the daily spot chart. Though prices flirted with a break of resistance as they made their $6.76 high, this luckily turned out to be noise, and the original prediction has since been vindicated. As you can see, prices broke out of the triangle and now look to be guided down in a bearish channel. How low will prices go in this downtrend?

Figure 1: Continuous Front Month.
Graphic provided by: CQG Net.
 
Using the typical technique of measuring the width of the triangle at its widest point and projecting down from the breakout, I get a target of $6.00 - $1.20 = $4.80. However, such a projection might seem a bit optimistic, as major trendline support is currently sitting in the $5.45 - $5.55 range.


Figure 2: January 2005 contracts.

Though the situation merits caution, I'm biased toward prices breaking through this long-term support, perhaps fulfilling the expanding triangle's prophecy. Looking to the winter months, at the January 2005 contract for example, there are a number of interesting possible developments. First, after a strong rally, prices have settled into a symmetrical triangle, which, though it normally signals continuation, is often a reversal pattern. In this case, it's reasonable to favor the latter implication, given that it's also recently broken under an accelerated trendline that has etched out the uptrend. While the breach of the original, flatter trendline would offer better confirmation of a change in trend, the recent move still looks like a good sign for the bears. If January prices do break out of the bottom of the triangle, a minimum target for the move is right around $6.00, conveniently near a prior low.

Though I favor the bears over the next few months, watch the prices as they approach these key resistance/support areas on both charts, as the winter is already moving very much in concert with the spot month. Signs of a reversal would include the continuous chart pushing above channel resistance, as well as the January contract's settling above the resistance line forming the triangle.



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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