Natural Gas Monthly Analysis for September 2012

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After rallying from 2.091 to 3.297 from April to July, Natural Gas futures peaked, triggering the start of a short-term break in August. Based on this near-term range, expectations are for a minimum correction into 2.6940 this month.

This price level is significant because it could become a secondary higher bottom. This type of bottom often leads to the start of a rally and perhaps a change in trend. If it fails to hold, then lower prices are to follow, increasing the chance of a test of the main bottom at 2.091.

The monthly swing chart offers the best assessment of the current trend. The series of lower-tops and lower-bottoms means the main trend is down. Based on the current price, the main trend will not turn up until the June 2011 top at 5.847 is violated.

Short-term analysis suggests that a bullish scenario could develop if certain events take place. Firstly, if last month’s low at 2.610 fails to hold then 3.297 will become the new main top and the new change in trend price.

MONTHLY NATURAL GAS CHART

MONTHLY NATURAL GAS CHART

Besides the swing chart, traders should also be watching the long-term Gann angle from the 19.473 top, currently at 3.473. If the top at 3.297 is taken out, the market will run into this angle. This will be an important test of an angle that has controlled the duration and the direction of the market for over 50 months. The first test of this price could attract fresh shorting pressure, but once exceeded may trigger an acceleration to the upside due to short-covering and executed buy stops.

Finally, based on the longer-term range of 5.847 to 2.091, a major retracement zone has been created at 3.969 to 4.412. After breaking out to the upside through the previous top and downtrending Gann angle, this zone may be the first objective for long traders.

It all looks complicated, but because of the prolonged move down in terms of price and time, it is going to take time and effort to unwind the large number of short traders still in the market. The longer it takes to form a solid support base, the greater the chance that accumulation is taking place and this will be needed to support the next rally.

At the start of the year, natural gas traders were concerned that inventories could reach full capacity if production continued at its current rate. But a significant decline in the natural gas active rig count, from 898 a year ago to 486, has stabilized prices. In addition, the fact that producers have not been injecting at the 5-year average rate could mean that we may not reach full capacity as forecast earlier.

A warm winter led to a slowdown in demand, but some of this loss may have been made up by increased demand this summer when excessive heat drove up electricity usage. Although it is going to take below normal temperatures this winter to put a serious dent into inventories, the fact that production is slowing, combined with a potentially bullish chart pattern, may lead to higher prices over the near-term.

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About:FX Empire Analyst - James Hyerczyk

James A. Hyerczyk has worked as a fundamental and technical financial market analyst since 1982. His technical work features the pattern, price and time analysis techniques of W.D. Gann.

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