Sunday, July 3, 2016

Time to sell the $NATGAS $NG rally, or has it turned bullish?

July 6 update:  NatGas NG has turned smartly from that $2.997, now the first real focus should be the June 23 low.  From that, it could rally some before testing lower.
The rest of the original post follows below:
Natural gas $NatGas (which some trade as $NG and others trade using $UNG) has reached the target of an inverse head and shoulders (inverse H&S, or IHS) pattern after digging a slightly lower low at $1.611 (slightly lower than its recent prior low).  So, many who bought or stayed long from its breakout above the IHS neckline of $2.304 might start selling it, either from the target met at $2.997 or on any sign of weakness.

Often the achievement of a H&S or IHS target is then followed by a strong reversal back, either as a partial retrace toward the "head" or even moving further.  This is because the H&S or IHS can be an intermediate pattern.  Since natural gas has been in a downtrend for so long, and its monthly wave pattern doesn't necessarily look completed, we shouldn't assume it's turned bullish.  One way to test that is to see if it maintains an uptrend channel in the coming months, so I marked trendlines for that on a monthly NatGas chart as you can see here.

On a daily NatGas chart I marked the IHS levels using horizontal purple lines, including the target $2.997, which was met on Friday (July 1).  We'll want to see if price spends much time working the $2.997 level, or turns down.  If it's not bearish but turning more bullish, then it might go higher to test monthly resistance at $3.18 or yearly at $3.24.

On an hourly chart of $UNG (since I can't pull an hourly chart of the continuous contract $NatGas), it looks like it thrust up from a triangle but exceeded the triangle target. Perhaps that was in order to push up to the IHS target; and $UNG doesn't track $NatGas perfectly either).  The thrust created an almost wedge-type shape (not a classic Elliott Wave ending diagonal triangle as best I can tell, but similar).  Using that angle for a parallel (rather than wedge) uptrend channel should help clue, if/when it breaks, that the current uptrend may have turned.

I've also included a weekly chart of $NatGas below, which helps show how this rally is retesting a previous triangular range it made before the prior lows. If the monthly chart downtrend isn't over, then natural gas might actually drop fairly persistently toward a lower low, rather than having another triangular chop, so I'm going to be rather skeptical of it unless it proves otherwise.  Certainly, traders should be careful in assessing what it's going to do next.

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