(NG) S-T Bull Divergence Could Ignite Broader Nat Gas Reversal

Technicals, October 31, 2011; 7:30am

The extent and impulsiveness of Fri's recovery above 25-Oct's 3.888 high breaks at least the short-term downtrend from 17-Oct's 4.039 high. This is clear. But against a backdrop of waning downside momentum on a daily scale, the market's recent position at the extreme lower recesses of the past couple years' range, historically pessimistic sentiment that in the past has warned of larger-degree recoveries, and a time of seasonal strength, traders are urged to acknowledge this relatively minor strength as possibly the start of a base/reversal environment that could produce significant gains in the weeks and months directly ahead. As a result of the past few days' recovery, traders are advised to move to a neutral-to-cautiously-bullish policy with weakness below Thur's 3.724 low required to negate this call and reinstate this year's broader bear. This said, an interim 3-wave corrective retest of last week's low would not be unexpected as part of this broader basing/reversal process in the days ahead.

The daily log close-only chart above shows the nicely developing potential for a bullish divergence in momentum. This divergence will be confirmed on a close above 14-Oct's 3.960 corrective high close that will, in fact, break this year's broader downtrend. Combined with the market's recent position at the extreme lower recesses of the past two years' range shown in the weekly log chart below as well as the recent drop to an 18% reading in the Bullish Consensus measure of market sentiment (www.marketvane.net) that, in the past, has warned of and accompanied all four of this market's past bases and reversals, it's easy to see the potential for the past few days' admittedly short-term strength to morph into a broader reversal higher.

Finally and as discussed in our blogs and webcasts for the past month or so, the monthly log chart below shows this market's seasonal tendency for strength in the Sep-Nov period of the year. Indeed, this market has either rallied further or based/reversed in 14 of the past 15 years. While Thur's 3.724 low remains intact as a new risk parameter, traders are advised to act on the premise that the past few days' pop is a very early stage to another such broader base/reversal process that, if correct, could produce strong, recovering nat gas prices for weeks or even months.

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