Last week’s climactic closing price reversal bottom in March Natural Gas may be signaling the start of a 2 to 3 week rally equal to at least 50 percent of the last break from 3.7410 to 2.2890. Depending on whether this market can set up a solid support base, this may develop into a long-term bottom but traders are going to have to be patient. Since the height of the market is determined by the length of its base, it could take weeks or months to set up the proper bottom.
At this time, aggressive buyers may be able to catch a quick rally into the first retracement zone, but do to the bearish nature of the fundamentals; it is a bit premature to be thinking about a change in trend. The first sign that the trend is turning up on the daily chart will be a move through the most recent swing top at 3.7410. Even if this occurs over the short-run, it is far more important that this market form a “W” bottom or support base, or the rally is likely to fail somewhere down the road.
Besides the 50 percent price level target, upside momentum may drive this market into the Fibonacci or 61.8 retracement level at 3.1860. Furthermore, although the market appears to be shedding a pair of long-term downtrending Gann angles at 2.5550 and 2.6720 this week, it may still run into fresh selling pressure at another downtrending Gann angle at 3.0210. Based on all of these potential scenarios, traders should recognize that any rally is likely to be labored.
Traders should also keep in mind that the formation of a closing price reversal bottom does not mean that a major bottom has been formed or even that the trend has changed to up. The key is the follow-through rally the next week through the previous week’s high. Markets make lower-lows and higher-closes all of the time without ever following through on the pattern. Traders should keep this in mind to prevent random buying that ultimately ends in failure.
This being said, March Natural Gas has to trade through 2.8380 to confirm the pattern and set it on course for the first objective at 3.0150. Increased volume and volatility will also be needed to create the upside momentum needed to complete the objective of the pattern.
Fundamentally, a short-covering rally was triggered last week by President Obama during his State of the Union address after he threw his support behind developing the natural gas industry. This made natural gas producers happy, but in reality they still face a tough road ahead because consumption still lags grossly behind production. Last week Chesapeake Energy announced it would be curtailing production, but unless other producers follow suit, crude oil storage capacity could reach 100% by May.
Keep this in mind before committing 100% to the long side. Let the market news play out and let the market form the necessary support base. Typically, the first leg of a good rally is triggered by massive short-covering. This is followed by a re-test of the main bottom and then a drive higher. If traders don’t buy the retest, then the pattern will fail. Remember that big money does not pick bottoms but usually help form the secondary-higher bottom. Until a secondary higher-bottom is formed, consider any rally short-covering or profit-taking.
