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Natural Gas Heading For a Breakout

On March 10 it was indicated that natural gas was near 20-year lows, and presented a buying opportunity (see Natural Gas Near Historic Lows-Buying Opportunity). The price actually bottomed on March 7 and continued to rally for another couple weeks.

Since mid-March though, the price has been moving sideways, following the bounce off the 1.844 June contract low. The sideways movement takes the form of an ascending triangle, with resistance at 2.13 to 2.164 and support between 2 and 1.986.

A move above 2.164 sets up a further rally. The triangle is 0.216 in height at its widest point. Adding the height to the upside breakout point gives an approximate target of 2.38. From a longer-term perspective (based on the above referenced article) when the price bounces off a historic low it has a tendency to reach 2.50, and ultimately 3.8 or higher. Whether this pattern will continue to play out is unknown, but it is something to keep in mind if natural gas breaks higher.

Figure 1. June Natural Gas Futures, Daily Chart

On the other hand, if the June contract sinks below 1.986 it's a warning sign that the long-term downtrend is still in effect. In that case, the downside price target is 1.77. If the downside breakout occurs, the region of 1.95 to 1.90 is expected to act as support, so watch how the price reacts there. If it shows strength, being short may not be best position. While there is a long-term downtrend in play, there's historic evidence suggesting a bottom is already in, or is close at hand.

If bullish, but looking for a better long entry, consider entry on a pullback into the 2.0 region. That way a stop loss can be placed not far below, and the reward:risk is more favorable than a 2.164 region entry.

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