(NG) Impressive Nat Gas Recovery: Corrective or Reversal?

Technicals, May 1, 2012; 10:20am

The past 1-1/2-weeks' rebound in nat gas prices is as impressive as any this market has experienced since at least late-Jan and arguably since Mar-Jun'11. Given the magnitude of the secular bear trend however, it would be premature to conclude that this 38.2% retrace (thus far) of Jan-Apr's latest 3.077 - 1.982 segment of the secular bear trend is anything but corrective ahead of resumed gains. This said however, the combination of historically bearish sentiment and the market's rejection (thus far) of the Sep 2001's 1.760 low defines 20-Apr's 1.982 low as one of developing importance and, quite possibly, the end of the major bear trend from Dec'05's 15.78 high.

In navigating any base/reversal threat- especially a potentially major one like this- we always require a market to satisfy our three reversal requirements:

• a confirmed bullish divergence in momentum of a scale sufficient to break the long-term down (in this case) trend
• proof of 5-wave, impulsive behavior in the direction of the suspected new trend, and, most importantly,
• proof of 3-wave corrective behavior on a subsequent relapse attempt.

Given the magnitude of the secular bear trend, strength above late-Mar's 2.42 corrective high shown in the weekly log chart below remains arguably required to break the long-term downtrend. Additionally, despite the extent of the past week's recovery detailed in the 240-min chart above, it's far from clear that this recovery isn't still a 3-wave (and thus corrective) structure only.

To be sure, at least the intermediate-term trend is confirmed as UP by virtue of yesterday's gains above 26-Apr's initial counter-trend high of 2.295 in the now-prompt Jun contract. And this is an important reaffirmation of at least near-term strength that defines yesterday's 2.150 low as a minor corrective low and short-term risk parameter the market now needs to fail below to arrest the recovery and expose it as a 3-wave, bear-market correction. In lieu of weakness below 2.150, further and possibly significant gains should not surprise, especially given historic levels of pessimistic sentiment. But given the scale difference between the past week's piddly pop relative to the mammoth secular bear trend, any bullish decision like short-covers or cautious bullish punts must be acknowledged as a shorter-term decision, not a longer-term one.


Given the magnitude of the secular bear trend but one that was approaching the extreme lower recesses of the past 11 years' price range shown in the monthly log chart below, in 10-Apr's Technical Blog we wrote:

"But while we expect this downtrend to continue, we also expect its pace to slow as it nears the extreme lower recesses of its historical price range. And this could lead to a much more challenging trading environment than the easy, down-trending one we've enjoyed for months as there will be no way to know whether any confirmed bullish divergence is just a corrective hiccup or the start of a broader reversal like the 153% pop that stemmed from the Sep'09 low."

The past week's recovery confirms the start of exactly this type of more challenging environment heading forward and one in which concluding either a major base/reversal or bear-market correction could prove costly. And when a market moves from a trending environment to a non-trending one- either corrective/consolidative OR reversal- moving to a more conservative approach to risk is urged.

These issues considered, a very cautious bullish policy is OK for shorter-term traders with tighter risk profiles with weakness below 2.150 required to negate this call and warrant a neutral/sideline policy. A bearish policy remains OK for long-term traders with strength above 2.420 required to threaten this view enough to warrant moving to a neutral/sideline position. This said however, the extent of the past week's rebound acknowledges historic lows and support in the upper-1.00-handle area (i.e. 1.75-to-1.90) that suggests maintaining a long-term bearish view is becoming a poor risk/reward bet. And while converting to a bullish position is premature, moving to a much more conservative bearish position is appropriate and advised.

< Back to Articles & Videos
< Back to Articles & Videos



Tweet