One of the things that it is important for traders to understand is that markets have a natural tendency to overshoot. The classic zigzag pattern either heading up or down that most people think of when they think of a stock chart is the direct result of that. When a move starts, momentum builds to the point where an overshoot from the logical endpoint of that move is inevitable, and when that point is reached a correction ensues. That too will overshoot and the move resumes in the original direction, momentum builds to push it just a little too far again, and another correction follows…etc, etc.
Nothing has been a better example of that recently than natural gas futures. First, the climb up from around 2.50 to around 3.35 that started in the middle of August had the classic Elliott Wave look that comes from this tendency, with three up waves and two correcting down waves. Once that pattern finished at the high of 3.366 we started on an extreme example of it again as NG, the natural gas futures contract, collapsed around twenty percent in under two weeks then jumped twenty percent from that mark in just a couple of days.
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That push back up above $3 proved to be very short lived though, and this week we have dropped back into the 2.70s. It would be logical, therefore, to assume that we are going even lower from here, but action over the last two days suggests that that is not the case, and that view is supported by fundamental…