Is Natural Gas About to Breakout?

Natural gas has been in a period of consolidation for the last two months. However, it appears we may be getting ready for a breakout based on the recent price action, bullish COT data, seasonality and positive divergences that are currently taking place in the nat gas market.

Below is a chart of the United States Natural Gas Fund ($UNG) going back the last nearly ten months. After the 22% drop from the last high made in June, price has been trading in a fairly tight range. This type of consolidation can produce some large moves as if it were a coil that was being pushed together. While this consolidation has been taking place, the Relative Strength Index has been putting in a series of higher lows. This bullish divergence has also led to the RSI making a higher high after Monday’s close.

In the bottom panel of the chart we have the On Balance Volume Indicator which simply adds the volume on positive days and subtracts the amount of shares traded on negative days. This tool can help us see if there is a bias towards buying or selling. Since the indicator has been rising its July low, we know that more shares have been traded when $UNG has been advancing compared to when it has been falling – a positive sign for nat gas bulls.

We’ll see if these bullish indicators of momentum and volume lead to price breaking above its August high.

UNG

Commitment of Traders 

The next chart I want to show is of the Commitment of Traders (COT) data for Natural Gas. The red line in the bottom panel of the chart shows the Commercial Traders, which are often company’s that deal with natural gas within their own business, so they are often considered the ‘smart money’ within a market. After going net-short the commodity earlier this year right before price peaked, the Commercial Traders have been slowing building back their net-position towards a historically high level. Even during this period of consolidation, the ‘smart money’ appears to have been picking up contracts in Natural Gas.

Nat gas COT

Seasonality

This final chart comes from Signal Financial Group and shows the 10-year seasonal trend for Natural Gas. Interestingly enough, the 5-, 10-, 15-, and 20-year seasonal trends all mirror one another, which in my opinion helps re-enforce the significance of this seasonal pattern. Like we have seen somewhat this year, price has put in a low in early September while showing slight strength during the last month. What catches my attention with this seasonal study is the large move towards the end of October that crates the historical first point of a double top before price has weakened into year-end and the first few months of the following year.

Nat gas seasonality

So it appears we have price getting ready to breakout of its two month consolidation. While at the same time momentum and volume are creating bullish divergences and the ‘smart money’ has been increasing their net-long position in Natural Gas based on COT data.

(At the time of this writing my firm holds shares of UNG in certain client accounts and may sell those holdings at any time. However, this is not a recommendation to buy or sell UNG, other natural gas-related or any investment vehicle.)

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Will Natural Gas Bounce?

Natural gas is the lone wolf of the commodity world, setting out on its own course while for the most part ignoring what the rest of the capital markets are doing. Short-term traders are often drawn to the high volatility of the nat gas market, rising and falling by greater degrees than just about any other commodity.

From the low in April, natural gas has risen nearly 70%, even taking into account the recent bout of weakness that’s forced the commodity to fall nearly 15% since mid-November. But recently we’ve seen the United State Natural Gas Fund ETF ($UNG) fall to a support line that’s been created off the April and June lows. Ideally we’d like to see a trend line tested at least three times in order to gain greater confidence in its ability to hold, but so far we’ve seen a slight bullish bounce in $UNG off the trend line that sits near $18.50.

Turning our focus to momentum we have one of my favorite indicators, the Money Flow Index (MFI) breaking down to a historically oversold condition. From a break below 20 we look for one of two things to occur. 1. a bounce from being oversold as buyers step in immediately and 2. price gives us a false break of the trend line and puts in a positive divergence in momentum that takes $UNG higher. These of course are not the only possibilities that could play out, but one of these are what natural gas bulls will likely be hoping to happen.

natural gas As I mentioned in the second option for the MFI indicator, we could see a break of the trend line. If this happens we obviously won’t be able to tell if it’s a false break until price action plays out and $UNG rises back above support. On a break we can look at volume and tell if it occurs on a heavily selling which would give a credence to further weakness or on light volume which would support the notion of a false break.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+.

Follow Up on the Aussie and Nat Gas

Today I wanted to look back on some of the charts that were discussed in the last few weeks.

First up is the Australian Dollar, which has been falling for a couple of weeks. On August 21st we looked at the rising channel that the Aussie had created as well as the sideways action in momentum based on the RSI indicator. We saw momentum and price breakdown, taking $XAD down almost 3%. From here, momentum has flipped over and is approaching a level that has shown $XAD to be oversold, we’ll see what happens if and when it gets there. There is still some fundamental impacts that could affect the price action in the Aussie Dollar as the RBA considers taking action to help prop up their struggling economy.

Next up is natural gas. We’ve been watching the ping-pong match happening between the 50-day and 200-day moving averages. We had a slight break below the 200-MA before we see the spot price of nat gas bounce back up to its 50-day.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+.