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Technical Analysis of the Natural Gas Market

Friday, May 11th, 2012
By for Profit Confidential

gold bullionWhile some energy prices have remained high this past year, such as crude oil and refined gasoline, natural gas has hit decade lows. These events have coincided because of the mild winter and a glut of new supply hitting the markets due to new techniques to extract natural gas, like fracking. This has led to an excess amount of supply being dumped into the energy markets, driving down natural gas prices. With inventory of natural gas 31% above the normal level over the last several years, there are some who are worried that storage facilities might be filled up the point where people will be giving natural gas away for free. Although this is quite rare, it is possible.

However, some recent developments in the energy markets show that perhaps there is some slight flicker of light for the energy market when it comes to natural gas. As electric utilities transfer from coal to natural gas generation, this has started to use up some of the supply in the ground. While all of this might work into the natural gas story over the next several years, as new plants are built that use exclusively natural gas, not much will be done to deplete the supply until next year’s winter.

stock market

Chart courtesy of www.StockCharts.com

As can be seen by the price chart, we are just coming off a new low at the end of April below $2.00 British thermal units (BTU). This comes after the move down from last summer. As can be seen by the horizontal line at approximately $2.20, it appears that natural gas might be in the process of bottoming out when looking at the technical analysis. Not only has the current price range that natural gas has just bounced up from been used as support in January and March this year, but also the natural gas market is now above the 50-day moving average, both important in technical analysis.

Looking at the divergence between the price of natural gas and the Relative Strength Index (RSI) as well as the moving average convergence/divergence (MACD), important for technical analysis, you’ll notice that the low price at the end of April was not followed with a low in the RSI or the MACD. This is what we call a “divergence pattern” in technical analysis. Technical analysis tells us that the underlying pressure is losing momentum, so the price might move further, but without the same level of underlying enthusiasm. Technical analysis also tells us that one cannot trade solely based off a divergence. There is no one “foolproof” method to trade from, just signs and indications seen through technical analysis. But when combined with other indicators, then the technical analysis will alert us that there is an increased probability of accuracy. All the signs point to a rebound in natural gas prices, most likely to the circled level, which is very close to the 200-day moving average at approximately $3.25. You’ll also notice this level has been used as support and resistance back in 2011. The more times in technical analysis a level is used as support and resistance, the more important that level becomes. A break below $2.20 would be a bearish sign and a retest of the lows is most likely at that point.

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While all of this points to a short-term possible move back up, it does not change the fact that there is a ton of natural gas being produced and space is running out for this excess supply. Perhaps this is a short-term move back up or perhaps it might be sustained; at this point we don’t know. I would not be long-term bullish until we see more depletion in the natural gas storage facilities, which won’t happen until next winter. Until then, follow the technical analysis roadmap.

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Sasha Cekerevac - Investment Advisor, Fund AnalyzerSasha Cekerevac, BA Economics with Finance specialization, is a Senior Editor at Lombardi Financial. He worked for CIBC World Markets for several years before moving to a top hedge fund, with assets under management of over $1.0 billion. He has comprehensive knowledge of institutional money flow; how the big funds analyze and execute their trades in the market. With a thorough understanding of both fundamental and technical subjects, Sasha offers a roadmap into how the markets really function and what to look for as an investor. His newsletters provide an experienced perspective on what the big funds are planning and how you can profit from it. He is the editor of several of Lombardi’s popular financial newsletters, including Payload Stocks and Pump & Dump Alert. Add Sasha Cekerevac to your Google+ circles