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Bounding Into Resistance: Positive Divergences Send December Natural Gas Higher

10/04/07 09:50:15 AM
by David Penn

Positive divergences in both the MACD histogram and the stochastic anticipated a move higher in natural gas futures in October.

Security:   NG, NGZ7
Position:   N/A

One of the most amazing collapses in the futures market in recent times took place in the market for natural gas futures in the second half of 2005.

Prices had been traveling in a wide range between, roughly, $7.50 and $5.00 throughout 2004 and through the first half of 2005. However, as prices moved higher in mid-August they managed to break out to new year-to-date highs north of $9.50 and kept on going. By the beginning of September, natural gas futures (basis continuous futures) cleared $10. By the end of the month, they passed above $14.00. After a short sharp pullback that saw the futures dip as low as $11 in mid-November, buyers were bidding prices higher once again, with natural gas reaching more than $15.75 by mid-December.

FIGURE 1: NATURAL GAS, CONTINUOUS FUTURES, WEEKLY. Negative divergences anticipated the top in natural gas futures in 2005. Positive divergences in both the stochastic and the MACD histogram appear to have signaled a bottom in the first half of 2006.
Graphic provided by: Prophet Financial, Inc.
Part of what is amazing about this spike in natural gas prices was the way the reversal was telegraphed. There may be no greater gift to the speculating community than a clear technical divergence at a top or bottom. And that gift was delivered right to the doorsteps of natural gas speculators everywhere December 30, when weekly negative divergences in both the stochastic and the MACD histogram were confirmed on the close. With a December 30th price of approximately $11.25 (basis continuous futures), natural gas was priced at a mere $6.65 only 10 sessions later.

Since then, natural gas prices have returned to the (broadly speaking) $7.50–5.00 range that preceded the spike and collapse.

In the summer of 2006, it appeared as if the collapse had come to an end. Prices had fallen to less than $4.60, but more important, a sizable positive divergence in both the stochastic and the MACD histogram developed, suggesting that the powerful downside momentum had finally ended. As I like to point out, there is a difference between momentum in one direction ending and momentum in the opposite direction beginning. So while the positive divergences were a bad thing for natural gas bears, those divergences weren't necessarily a "good" thing for natural gas bulls.

FIGURE 2: NATURAL GAS, DECEMBER FUTURES, DAILY. Positive divergences in both the MACD histogram and the stochastic suggest higher prices ahead for natural gas.
Graphic provided by: Prophet Financial, Inc.
Until, perhaps, now. Zooming in to look at the December contract for natural gas, we can see smaller, shorter-term positive divergences that could play a role in a sustained move higher. Specifically, these divergences relate to the "higher in price/lower in indicator" lows of late June and the "lower in price/higher in indicator" lows of late August and signaled a buying opportunity on August 28 that was not filled until September 12 at approximately $7.92.

One thing that is especially promising for natural gas bulls at this juncture is the presence of a sizable MACD histogram peak in September. This peak, coming just as prices were rallying from the bottom of the correction in late August/early September, is higher than any going back several months. As such, it is strongly suggestive of higher natural gas prices.

David Penn

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

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