Are Natural Gas Prices Basing For A Move Higher?

Natural Gas prices started trending sideways at the beginning of the year. This was in the context of a downtrend from a peak in early 2014. The sideways movement indicates supply and demand came into balance. These periods are usually followed by breaks until the next supply/demand equilibrium is found at a higher or lower level.

Consider the case of a break higher: everyone who bought during the sideways period has their market view validated, lending confidence to buy more; meanwhile, those who sold short are squeezed and rush to buy back in order to limit losses. These two sources of demand drive a breakout. The same dynamics work in reverse in the case of breakdowns.

A period of sideways trading within a larger downtrend represents either A, a pause before the market heads still lower, or B, a base that leads to a run higher (sometimes the rise is temporary; sometimes a larger reversal takes place). Momentum oscillators can’t help you much here because momentum improves in both scenarios A and B.

The one piece of evidence that tilts the odds toward a run higher for Natural Gas prices is that the lows in March didn’t make it down to the low in February. That means selling enthusiasm lessened. It also gives a clear line in the sand beneath which a bullish view is proven wrong.

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Natural Gas prices gapped lower in December, leaving empty space from 3.469 to 3.376 that should fill at some point. If natural gas does break higher in the near term, that would be a natural price level to watch. There isn’t any technical resistance beneath it.

natural gas prices consolidating_chart march 2015

Given the high volatility of this market – and plenty of experience being wrong myself about natural gas – I wouldn’t consider trading it without some kind of a hedged position. A straddle is one possibility. A call spread is another. This applies to the United States Natural Gas ETF (UNG) as well as the futures contract.

Be aware that Natural Gas is one of the riskiest markets to trade, and determine your position size accordingly.

Good trading, everyone!

     Follow Chris on Twitter:  @ChrisBurbaCMT

No position in any of the mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.