Natural Gas/DGAZ/UGAZ

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Original post - 20th Jan 2020  

Posted here - 8th Feb 2020

[Natural Gas] A longer term perspective

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

“Patterns repeat, because human nature hasn't changed for thousand of year” - Jesse Livermore

A thorough review of the 20 year chart for Natural Gas reveals the importance of the current price range in Natural Gas. It shows that the price range between 1.6-1.9 has never been sustainable beyond a few weeks for the last 20 years.

 

Each time such a range has been approached, the market has caused a significant bottom followed by a major reversal. There are many fundamental and technical factors driving such price action.

Fundamental Factors

a] Producers [commercial] begin to hurt at extremely lower prices. The industry signals a down turn resulting in drastic production cuts impacting the overall supply-demand balance. Such cuts, if pursued, is a planned cut that lasts for many months and has a major impact on the supply-demand balance. That is the reason why the prices after bottoming do not revisit the significant bottom even in summer. In other words, the new supply-demand balance keeps the prices supported even during summer.

b] Higher Power-Burn with Natural Gas comes into play. Electricity in the US is still generated mostly through coal. NG replaces Coal whenever prices begin to reach the bottom of the range. Electricity generation companies grab the opportunity to keep their cost low by replacing coal with a cheaper source of input which is NG. This event too causes an impact on the overall supply-demand balance to keep the prices supported.

Technical Factors

1] As the prices get hammered to the lower end of the range, oversold indicators begin to appear on the longer time frames [Daily, Weekly]. Such indicators, be it MACD, RSI, TSI, often become points for significant bottom and major reversals. 

2] Elliott Wave patterns which have at least nine degrees of waves, from the smallest discernible on an hourly chart to the largest wave with the all the existing data available, begin to operate in their largest degrees. In EW terms, these are called Grand super cycle or super cycles. So, when such lower extremes are approached, the patterns tend to complete a large WAVE(2) and set up the stage for the next big reversal in WAVE(3) over the next many months and sometimes years.

The above note is intended to provide a longer term perspective on Natural Gas.

“Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” - Sir John Templeton