Natural Gas News: Today’s Chart Shows Classic Pattern Forming After Prolonged Drop

February Natural Gas Futures Show Classic Reversal Pattern Formation

February natural gas futures are edging higher on Friday while forming the classic chart pattern that usually decides if we’re going to see a continuation of the downtrend or an aggressive counter-trend rally.

It all goes back to the swing created by the December 5 main top at $5.022 and the December 22 main bottom at 3.467. That break was $1.555 in 11 sessions. Typically, major corrections last 7 to 10 days. That qualifies it as prolonged move down in terms of price and time.

At 18:34 GMT, February Natural Gas Futures are trading $3.885, up $0.125 or +3.32%.

Market Establishes a Potential Bottom Following Prolonged Decline

So we have our prolonged move down in terms of price and time, which then sets in motion the next part of the pattern…the bottoming action. The best sign of a valid bottom, in my opinion, is the closing price reversal bottom, but in this case, the weather forecast changed overnight, and the market gapped higher on December 23.

Rally Creates New Minor Swing; Targets and Support Levels Identified

The subsequent rally produced a new minor bottom at $3.467. Another higher-high brought the market to $3.976, forming a two-day swing and completing the long-swing from $5.022 to $3.467. The midpoint of this swing is $4.245. That’s the new upside target.

The new minor swing is $3.467 to $3.976. Its midpoint is $3.721. This is potential support. Professional traders don’t enter trades unless they have a “lean”, which why they usually aren’t trying to pick a bottom. They don’t try because they don’t have anything to “lean-on” during a prolonged downtrend.

Short-Covering vs New Buying: Who’s Fueling the Move?

The first leg up from a major bottom is usually driven by short-covering. Very little new buying takes place with shorts paying anything to get out of a rapidly changing market. The next leg of the move is usually 50% of the first leg up. In this case, $3.467 to $3.976 produces a 50% level at $3.721. This is the level that new buyers usually enter on since they can “lean” on the main bottom at $3.467.

Rally Fails to Reach $4.245, Suggesting Incomplete Short-Covering

The question I have is, “Did the rally from $3.467 to $3.976 chase out enough shorts to attract new buyers?” In my opinion, the answer is “no”. Why, you ask? Because I would have preferred a rocket surge into the longer-term pivot at $4.245, which falls nearly at the middle of the range formed by the 50% level at $4.152 and the 200-day moving average at $4.366.

Short-Term Outlook Hinges on Buyer Support at $3.721

As far as the short-term forecast is concerned, I can support the idea of a near-term surge into the zone created by the 50-Day MA at $4.152, the 50% level at $4.245 and 200-Day MA at $4.366. However, new buyers are going to have to come in to support the minor 50% level at $3.721. If they don’t, the market is going to revisit the bottom at $3.467.

Pattern Could Signal Another Shorting Opportunity on Resistance Test

Despite this potentially bullish counter-trend rally set-up, I don’t see a change in trend in the cards at this time so I suspect this is going to turn into another shorting opportunity if the market can rally into the resistance zone.

It’s a classic pattern following a prolonged move down. Not only does it make you focus on the prices, but you have to know if shorts are covering and new buyers are entering. So pay attention to the changes in open interest.

Holiday Volume and Key Reports Could Blur Pattern Clarity

Furthermore, what makes the pattern a little more difficult to assess at this time is the thin-holiday buying, weekend weather and the weekly storage report due on December 29.

The good thing about this formation is that you know the entry and exit points ahead of Monday’s trade when we should get some clarification on the weather and storage. Nonetheless, classic patterns tend to work better when the volume is at or above average volume.

More Information in our Economic Calendar.