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Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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Is Natural Gas Poised For An Upside Breakout?

Natural Gas

My work suggests that the Natural Gas market may be poised for a strong rally this winter. The excessive supply has been trimmed because of the strong demand this summer and as producers cut output. Although we’re likely to see a steady flow of injections during the fall season, if this current monthly chart pattern can hold up, then going into the winter, we may be poised for an upside breakout.

This week, we’re going to take an early look at the March 2017 Natural Gas chart because we want to be able to take advantage of a move that takes place during the winter when demand will likely be higher because of the return of cold weather.

(Click to enlarge)

Technical Analysis

October begins with March Natural Gas futures market in an uptrend according to the monthly swing chart. The trend has been up since April when a rally took out a top at $2.953. The uptrend is going to resume when $3.422 is taken out. And will change to down when $3.111 is violated.

The main range is the June 2014 top at $4.606 to the February 2016 bottom at $2.468. Its retracement zone at $3.537 to $3.789 is the primary upside target.

The short-term range is $2.468 to $3.422. Its retracement zone is $2.945 to $2.832. This will be the primary downside target if the selling pressure is strong enough to take out the $3.111 main bottom.

Based on the current price at $3.367, the nearest Gann angle target is the downtrending angle $3.486. The nearest support angle comes in at $3.108.

The market is currently trading inside a major triangle formation and between a pair of retracement zones. These areas are acting to compress or squeeze the market into a range. While it is in this range, we could be looking at a choppy, two-sided trade as buyers and sellers battle it out for control.

The two-sided battle is taking place in the fall season, a time when demand is low because the summer heat has disappeared and the winter cold has yet to make its appearance.

The price compression often leads to excessive volatility because at some point the uptrending and downtrending angles will form an apex. According to the monthly chart, the two angles will cross in January. Trader reaction to this apex should determine the direction of the market after January 2017

Forecast

During October, we expect prices to remain inside the triangle chart pattern. This month, our upside potential is the downtrending angle at $3.486 and our downside target is the uptrending angle at $3.108.

In November, the downtrending angle will move down to $3.446 and the uptrending angle to $3.188.

In December, the downtrending angle will move to $3.406 and the uptrending angle to $3.268.

Finally, during the key month of January, the downtrending angle will move to $3.366 and the uptrending angle to $3.348.

Using our angles to make a forecast, a sustained move over $3.366 in January will indicate the presence of buyers. This could trigger a further rally into the major 50% level at $3.537. This is another trigger point for an acceleration into the Fibonacci level at $3.789

The natural gas market could extend the rally in January if $3.789 is taken out with conviction with the next major target coming in at $3.986.

On the downside, a failure to hold $3.348 in January 2017 will send a bearish signal. This could trigger an acceleration into the short-term retracement zone at $2.945 to $2.832. Another valid downside target will be the uptrending angle at $2.908.

Swing Chart Forecast

Let’s take a look at the swing chart for our next forecast. The rally earlier this year was $2.468 to $3.419, or $0.951 in 5 months. Working with the bottom at $3.111 and assuming a similar rally, the swing chart indicates a possible move to $4.062 by January 2017.

Conclusion

Based on our technical analysis and given the current fundamental conditions, and in anticipation of the return of winter, our charts indicate the potential of a rally into $3.986 to $4.062 during January 2017.

If temperatures are above average this winter then the downside potential in January 2017 will be $2.945 to $2.82.




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