Natural Gas futures plummeted 7.8% on Monday, following Friday's 4.9% drop. The price of the commodity is currently fluctuating as traders attempt to grasp where the commodity will head next after its two-day selloff that included the breakout of a 3-week range.
Two pieces of news hit traders on Monday, with oppositional impacts. Weather models over the weekend revealed no cold spells in the short-term and the absence of chilly weather means lower demand for the energy commodity than anticipated, a bearish development.
However, Moscow decided not to boost its promised natural gas shipments to Europe, even after President Vladimir Putin suggested he would. More limited supply than expected is bullish for the price of NatGas.
Still, the sell-off didn't reverse. We derive two insights from this. First, even though bears had a weekend during which to cool off, they decided to increase their attack. More important however, the selloff started ahead of the weekend, even before the weather models showing a warmer-than-anticipated autumn were released.
We can't help but wonder, therefore, if what we're seeing is a demonstration that prices of the already 'hot' commodity—that's recently been trading at record highs—were already ripe for profit-taking.
The contract just completed a small H&S top, only three weeks in the making. However, that could have been long enough to warrant a correction within the uptrend.
Because the most recent uptrend line, since the Aug. 19 low, had been breached it would make sense to expect the price to fall toward the next support line since the April low.
But there's still a broader uptrend in play. The earliest trendline is from the late-June 2020 bottom. That makes this recent, shorter trendline the third within the broader uptrend.
Usually, the price corrects after three escalating uptrends, as is the case here. We expect the dip to be temporary though. As long as the uptrend remains intact, we anticipate natural gas to hold and possibly even turn higher after a short-term drop.
Both the MACD, a comparison of different price averages and their interplay, and the RSI, which measures changes in momentum, have turned around. This demonstrates broad weakness across price and the speed at which the price changes.
However, as we expect this to be a short-term dip, fueled by profit-taking, we see the major moving averages are holding up for now.
Determining where they are on the chart can help gauge where the bullish strongholds are. The 200 DMA is guarding the original uptrend line. The 100 DMA is realigning with the second uptrend. Finally, the 50 DMA—which could not keep up with the rapid ascent of the third uptrend—is, nevertheless, supporting the price for now.
Note that as the 50 DMA could not maintain the rally's dizzying speed, it wasn't sustainable.
Trading Strategies
Conservative traders should wait for the price to retest the neckline, demonstrating ongoing supply.
Moderate traders, too, would wait for a return move, for a better entry, if not a bearish confirmation.
Aggressive traders could enter a long contrarian position, counting on a bounce that follows a short cover—as the hourly chart develops an H&S bottom— provided they accept the higher risk that goes along with the higher hoped-for rewards. Money management is crucial for survival.
Contract Specs
- Contract Unit: 10,000 MMBtu (Metric Million British Thermal Unit)
- Price Quote is in US dollars and cents per MMBtu
- Value of each tick: $10.00
Here's an example of just one way to handle an aggressive trade. Note that it's not fortune-telling. Even the most carefully plotted trade can fail:
Trade Sample
- Entry: 5.000
- Stop-Loss: 4.900
- Risk: $1,000
- Target: 5.300
- Reward: $3000
- Risk:Reward Ratio: 1:3