Author: Dean Rogers, CMT

Dean Rogers, CMT is the general manager of the Kase Call Center in Albuquerque, New Mexico. He oversees all of Kase and Company, Inc.’s operations including research and development, marketing, and client support. Dean began his career with Kase in early 2001 as a programmer but has developed into Kase’s senior technical analyst. He writes Kase’s award-winning weekly Crude Oil, Natural Gas, and Metals Commentaries. He is an instructor at Kase's classes and webinars and provides all of the necessary training and support for Kase's hedging models and trading indicators for both retail and institutional traders.

Natural gas’ pullback still appears to be corrective, but has positioned itself to test a crucial decision point at $2.71. This is in-line with the $2.711 swing low, the 1.618 projection of the wave down from $3.105, and the 61.8 percent retracement of the move up from $2.443.

The $2.71 objective should be challenged ahead of tomorrow’s EIA report, which is confirmed by KaseX’s short signals on the $0.035 KaseBar chart today. The confluence, positioning, and importance of $2.71 leads us to believe that it will hold, at least initially, and will be followed by a trading range similar to the one seen throughout March.

This is a brief analysis ahead of tomorrow’s EIA report. Our weekly Natural Gas Commentary is a much more detailed and thorough natural gas forecast. If you are interested, please sign up for a complimentary four week trial.

Gasoline futures formed a double top at approximately 209.5 after attempting to overcome this crucial area of resistance in early trading Tuesday. The double top and confirmed dark cloud cover call for at least 195.0. This is a crucial decision point for an extended correction because 195.0 is in line with the 196.21 swing low and 38 percent retracement from 169.25. A close below 195.0 will confirm the double top and open the way for its target near 183.7, which is also near the 62 percent retracement.

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For the past few weeks many traders have doubted the rationality of natural gas’ price surge and have been looking for a stalling point. It is hard to argue with the charts though, and our analysis, based purely on what is happening on the charts, has called for $3.05 as a potential stalling point. We have stated in our weekly Natural Gas Commentary that a correction from $3.05 would likely take place as long as it held on a closing basis. The $3.05 target was overcome by the $3.105 swing high, but Tuesday’s blow-off high and key-point reversal on the daily chart, KasePO and KaseCD divergences on the $0.035 Kase Bar chart shown below, and failure to close over $3.05 indicate the move up has stalled and the anticipated downward correction is now underway.

Today’s close below $2.92, the 0.618 projection of the wave down from $3.105, opens the way for $2.85. We are looking for the correction to extend to at least $2.85 and possibly $2.73 over the next week or so. Tomorrow’s EIA number will not likely influence the downward correction unless it is extremely bullish and out of line with expectations.

Ultimately, we see that support between $2.85 and $2.73 will hold and a trading range similar to the one experienced from mid-February until late March between approximately $2.73 and $3.05 will ensue while the market awaits directional confirmation from summer weather and/or other related factors.

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The WTI-Brent spread has been fluctuating in a range for the past few weeks after narrowing to an intraday high of (3.34) on April 15. The narrowing spread has supported rising WTI and Brent price, and the wave formations indicate the spread will most likely continue to narrow. However, it must overcome (5.50) to make the connection to a (4.30) decision point. A close over (4.30) would open the way for a confluent (2.30) target, which connects to (1.30). That said, a close below (8.40) would call for the spread to wide again to at least (10.3).

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Many traders and analysts have been skeptical of natural gas’ recent price surge. However, technical analysis is good at telling us what the market thinks about itself, and it is hard to argue with the bullish technical factors that have formed over the past few weeks.

The June natural gas futures contract is testing a crucial decision point at $2.93. This is an important confluence point for many technical factors and is most importantly the 0.618 projection for the waves up from $2.481 and $2.711. The near-term fate of natural gas prices will be determined by a close above or below $2.93.

A close over $2.93 would indicate market participants are expecting a bullish EIA report tomorrow and for prices to push for at least $3.05. There is a momentum divergence setup on the KasePO, which indicates the move up is becoming exhausted. However, based on many other positive technical factors, we expect to see a close over $2.93 and rise to at least $3.05, which is the next lynchpin for a bullish summer recovery.

A close below $2.93 would signal continued hesitance and doubt that this move up will be able to overcome $3.00. Look for support at $2.78 and $2.66. Even upon a significant correction we expect $2.66 to hold.

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For the past few weeks WTI crude oil prices have risen significantly, and for the first time since early December 2014 prices closed above $60.0 last week. However, many traders are questioning the long-term validity of the price rise continuing due to concerns of a persistent supply glut, and the technical factors show that the market reached a crucial decision point at $62.58 last week.

The June WTI futures contract met crucial resistance at $62.58 on Wednesday, May 6, and as called for in our weekly Kase Crude Oil Commentary, prices have begun to pullback in a corrective manner. The correction is taking place after a blow-off high and evening star setup formed that same day. The evening star (some might say shooting star) was both completed and confirmed on Thursday when prices closed below the midpoint and open of Tuesday’s Harami bar. In addition, bearish divergences on the KaseCD and KasePO were confirmed on Friday. The combination of negative short term technical factors indicates the downward correction should extend and will likely form Wave IV of a longer-term five wave formation that projects to target in the mid-to upper $60s and even the low $70s.

We expect the pullback to challenge at least $56.2. This is the 38 percent retracement of the move up from $45.93 and is near the bottom of the sub-wave 4 of III. If prices are going to extend to new highs in the next week or so, $56.2 must hold. Otherwise, a close below $56.2 would call for the 50 and 62 percent retracements at $54.3 and $52.3. For now, it looks as though $56.2 will hold. The long-term outlook would only shift back to being bearish upon a close below $52.3. We do not expect to see a decline of that magnitude.

Today’s decline was nominal, so the next few days will be crucial for the near-term direction. A close over last Thursday’s $59.82 midpoint would shift the near-term outlook back to positive, call for another test of $62.5, and likely open the way for the five-wave pattern to unfold to upper targets of $66.8 and $71.5 over the course of the next few months.

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It is hard to deny the strength of the natural gas price rally over the past two weeks. Last week’s bullish engulfing line, April’s bullish hammer and morning star setup, and bullish daily divergences on the KasePO, KaseCD, MACD, RSI, and Stochastic are all technical evidence that the move down may finally be complete. However, many traders are skeptical of the move up and are asking what fundamental factors would support a recovery over the course of the longer-term. It is a fair and accurate question. Tomorrow’s U.S. Energy Information Administration (EIA) Natural Gas Weekly Update should provide a strong clue regarding the potential strength of a continued natural gas price rise.

In addition to the aforementioned bullish technical factors on the monthly, weekly, and daily charts, the short term technical factors and wave formations show evidence for a move to at least $2.93. This is a decision point because it is the 2.764 (XC – shown in red) projection for the wave up from $2.481, the 1.00 (E – shown in pink) from $2.557, and the 1.618 (L – shown in purple) from $2.747. In addition, $2.93 is the last level protecting mid-March’s $2.982 swing high. A sustained close over this would open the way for an extended move to targets above $3.00. However, $2.93 will not likely be tested until after tomorrow’s EIA report, if at all, because most traders are waiting for confirmation from another lower than expected build.

There is good reason to be suspicious of this move up, and a disappointing EIA report tomorrow could be the catalyst to turn prices lower again in very short order. Therefore, until there is a sustained close over $2.93 caution is warranted.

The daily chart has formed a hanging man and evening star setup as of this mid-day analysis, and a close below Monday’s $2.78 midpoint would complete the pattern. This would then open the way for $2.65, the 50 percent retracement of the move up and last week’s midpoint. A close below $2.65 would confirm the move up is over and most likely point toward the market settling into a trading range while it sorts itself out.

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Brent crude oil prices will likely test a key decision point at $68.0 this week. This is the 1.00 projection for the wave up from $50.1, and a confluent projection for the sub-waves up from $53.63. A close over $68.0 would confirm that a long-term bullish recovery is underway. Narrowing calendar spreads support the move up, but are still wide by historic standards. First class long permissions (blue dots) on the KEES indicator also confirm the positive tone.

That said, momentum is waning on the KaseCD and is setup for a bearish divergence (higher high in price with lower high in momentum). The KasePO is quickly nearing overbought territory. There are also a daily bearish hanging man and evening star setup. These and a few other negative factors tell us that Brent will likely stall at $68.0. We expect to see a significant correction take place to test the mettle of the market before the move up extends much higher than $68.0.

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For the second week in a row natural gas futures gapped lower on Monday. This might be an exhaustion gap, which in many cases signals the end of a long and drawn out trend. The top of the gap at $2.555 has been overcome as of Wednesday midday, and a close over this would call for an extended correction to at least $2.67, the top of last week’s gap and the 38 percent retracement from $2.982. These technical factors could be an early warning that a bottom has finally been made.

That said, we think it is premature to definitively state the bottom has been made. We will hold off on delving too deeply into that conversation until at least $2.67 is overcome. Most technical and fundamental factors are still negative, and while we do think the market is nearing a bottom, most evidence points to a target about 10-15 cents lower. The June contract met confluent support at $2.48, but the key objective that we have identified for weeks in our detailed natural gas forecast has not been met yet. A close back below $2.555 before the end of the week would signal that the upward correction has failed again.

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June WTI crude oil has oscillated in the range of a broadening wedge over the last eight trading days. The pattern is bullish, but the euphoria of WTI’s recent price surge is waning. Mixed technical and fundamental factors indicate the pattern will fail if the $58.41 swing high is not overcome soon.

Key technical support for the near term is $55.3 because it is the 1.00 target for the wave down from $58.82, and intersects with the lower trend line of the expanding wedge. This wave stalled at its 0.618 projection of $56.5, so the market is sitting on the teetering edge of a decline to $55.3 or push higher to overcome $58.41. A close over $58.41 would confirm a break higher out of the wedge and would open the way for an extended upward correction. A move below $56.5 would open the way for $55.3 to be challenged. Overall, odds are still slightly in favor of the move up and a break higher out of the wedge, but a close below $55.3 would indicate the pattern has failed.

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Midweek Natural Gas Forecast – May 27, 2015