Natural Gas Price Forecast: Failed Bounce Keeps Downside Risk Elevated

Hammer Breakout Lacks Confirmation

Following a new retracement low of $3.79 on Monday, on Tuesday, natural gas broke out of a bull hammer type pattern, rising to a high of $4.18 for the day. Sellers subsequently took back control and drove price into the lower half of the day’s range, where it remains at time of writing. Although a higher daily high and low were established on Tuesday, a daily close below Monday’s high of $4.03 will show a failure to confirm that one-day breakout.

Lower High Signals Second Leg Down

Given Monday’s sharp bearish reversal following a successful test of resistance near the 20-day average the price of natural gas remains under pressure. The reversal generated a lower daily high at $4.59, likely putting an end to the counter-trend rally. Monday’s decline to a lower retracement low shows the potential for a second leg down from the $5.50 trend high reached earlier this month. Symmetry in price between the two downswings is reached at $2.89, providing a potential downside target. However, to reach that lower price level higher key potential support levels would need to fail first.

Fibonacci Support Defines Next Downside Targets

Support for the retracement has been seen near the 61.8% Fibonacci retracement zone of $3.89, and the top boundary line of a rising trend channel. If a sustained decline triggers below the current low of $3.79, the 61.8% support zone will have failed. Based on Fibonacci analysis, the next lower target would then be $3.45, the 78.6% Fibonacci retracement level. However, the potentially significant 200-day moving average is a little higher, at $3.57 currently.

200-Day Average Becomes Key Support Focus

The current bearish correction is the first pullback towards the 200-day line since it was reclaimed in late-October. Resistance near the 200-day line was seen during two periods in October prior to the upside breakout. So, the expectation is for signs of support to occur near or above the 200-day average if the bearish correction continues to lower prices. If not, the price area around the 78.6% level becomes a key area for support to be seen. Depending on when the lower Fibonacci level is reached, a lower rising channel line might also assist in identify areas of dynamic support.

Broadening Range is Alternative Scenario

An alternative scenario is that last week’s outside week shows the potential for a broadening formation to evolve as price consolidates. If so, additional consolidation within a range from around today’s low of $3.79 and up to last week’s high of $4.59.

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