Reading the technical tea leaves

Natural Gas Report
By Casey Whelan | July 11, 2013

July 1—Technical analysis in commodity markets has been widely used by traders for several decades to divine market risks and opportunities. The concept behind technical analysis is that markets tend to move in somewhat predictable patterns. At the end of each pattern, the market evolves into another pattern. The key is to recognize patterns that will persist (profitable trades) and stay away from patterns that fail (unprofitable trades).

An argument can be made that the market has moved in a systematic and persistent pattern within an upward pricing channel for more than a year. When market prices hit the top end of the channel (resistance) the market responded and moved down. Then when market prices hit the low end of the channel (support) the market again responded and moved back up. Each time the market gets to a major support or resistance level, the challenge is to determine if the market will continue to follow the current pricing pattern or start a new pattern. The market is again at the low end of the price channel and testing support. The next market move will be important, from a technical perspective, in establishing whether it is simply at a periodic low point and moving up, or at the beginning of new technical trend likely leading to lower prices. If the market forcefully breaks through support at roughly $3.60 per MMBtu, there is a strong likelihood that $3.20 per MMBtu, the next level of support, will be tested. Breaking through $3.20 per MMBtu, could mean the market is on the way to $2.60 per MMBtu. 

Over the past month, market sentiment has changed from “the sky is the limit” to the “the sky is falling.” This change may explain why we have moved to support levels again.  At this point, it isn’t known which view will win out, however, a wild ride is expected as the bulls and bears fight it out.  Those who need to cover winter positions may want to let the market figure out which direction it wants to go before layering in additional hedges.