Midweek Natural Gas Forecast – March 4, 2015

Tag: retracements

Cold weather continues to support natural gas, but the wide sweeping frigid conditions have not been enough of an influence to drive prices higher. Fundamental and technical factors leave little doubt that the outlook for the next several months is bearish, but for now, natural gas prices are stuck in a trading range bound between approximately $2.55 and $3.00.

Prices fell last week after the disappointing U.S. Energy Information Administration (EIA) Natural Gas Weekly Update, and a swing low of $2.641 was made on Tuesday. The $2.80 midpoint of last Thursday’s candlestick held Wednesday morning, which may be an early indication that another disappointing EIA update is expected tomorrow. The $2.80 level is confluent resistance because it is also the 38 percent retracement of the decline from $3.045 to $2.641.

There are a few short term positive factors (green arrow and triangle) triggered by KaseX on the $0.05 KaseBar chart, and a close over $2.80 would open the way for key resistance at $2.90. The $2.90 level is the 62 percent retracement from $3.045 and the 0.618 projection for the wave $2.589 – 3.045 – 2.641. This is crucial, because waves that overcome the 0.618 projection typically extend to at least the 1.00 projection, in this case $3.10. We expect $2.90 to hold, but a close over this level would shift near term odds in favor of another attempt at $3.10 and higher.

Natural Gas Forecast

First support is $2.70, and a move below this would call for the $2.641 swing low and $2.589 contract lows to be challenged. The most important target is still $2.55, because the technical show that it is the gateway objective for a decline into the low $2s. It will likely be at least a few more weeks before prices close below $2.55.

So for now, our analysis leads us to believe that a near term test of resistance at $2.80 and possibly $2.90 will take place, but that $2.90 will hold and prices will continue to oscillate in a sideways range.

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Natural gas’ decline stalled at $2.567 on February 6. This was near the very crucial bearish decision point of $2.52. Subsequently prices have risen to $2.857. The market is likely settling into a range that is being supported by external factors (i.e. cold weather), but is searching for the upper end of this range.

A confirmed daily morning star and a few weak momentum signals (white arrows) on KaseX indicate the upward correction should extend. However, the correction met and held the 38 percent retracement from $3.299 to $2.567 at $2.85. In addition, KaseX has already generated a short warning (yellow down triangle), and prices are sitting just below the crucial $2.79 level. The $2.79 level has been major support for week, and it is now key resistance. It was tested one and held already on February 3, so a close over this would be positive for the near term.

Natural Gas Rise

Overall, the charts and technical factors discussed indicate that traders are anticipating a bullish U.S. Energy Information Administration (EIA) Natural Gas Weekly Update tomorrow. However, there is some uncertainty to this move, which is why prices backed off the $2.857 swing high morning and are hovering around $2.79.

A close over $2.79 would open the way for $2.85 again, and likely $3.02, which is the 62 percent retracement from $3.299. The $3.02 level should hold unless tomorrow’s EIA number is much more bullish than anticipated. A close below $2.79 would call for $2.68 to be challenged. This is the 62 percent retracement from $2.567 to $2.857. A close below this would then call for another test of the $2.52 decision point.

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Last week’s natural gas price rise was poised to fill December 22nd’s gap from $3.48, but the upward correction stalled at $3.352. The week settled above the $3.09 midpoint of Wednesday, January 12th’s candlestick, leading to speculation that the market might try to rise again early this week. However, Monday’s intraday gap down from $3.056 and settle back below $3.00 was negative for the near-term outlook.

There is still major support at $2.80 that has held so far, but after this morning’s move up stalled and failed to fill to $3.056 gap it looks as though a bearish U.S. Energy Information Administration (EIA) Natural Gas Weekly Update is expected tomorrow.

The key wave for the short-term is $3.352 – 3.024 – 3.228. This wave has already fallen below its 1.00 projection at $2.90 and is poised to meet at least its 1.382 projection at $2.77. This then connects to $2.66 as the 1.618 projection. The $2.66 target is highly confluent for many of the larger and earlier waves down, and is the 0.618 projection for the wave $3.95 – 2.783 – 3.352. The confluence is important because a sustained close below $2.63 would open the way for a decline into the mid-to-low $2’s over the course of the longer-term. Therefore, $2.63 is a potential stalling point for the decline.

nat gas

The KaseX indicator on the 240-minute equivalent Kase Bar (KBAR) also confirms the negative outlook and has generated several short signals (purple arrows) during the decline from $3.352. The most recent short signal came after the $3.015 swing high this morning. At this point, there are no warning signals that indicate profit should be taken or that short trades should be exited. This will likely change though should prices recover above the $3.015 swing high.

First resistance ahead of the EIA report is $3.06, which is near the top of the $3.056 gap. A move above this would call for 3.15, which is the 0.618 projection for the wave $2.783 – 3.352 – 2.821. The $3.15 level is confirmed as the 62 percent retracement from $3.352 to $2.821. It is also interesting to note that this morning’s rise to $3.015 stalled just below the 38 percent retracement at $3.02. This is another negative factor.

To summarize, the bias is negative, and the move down is expected to continue. There is strong support at $2.80, but a move below this would call for at least $2.77 and very likely $2.66. Resistance at $3.06 will likely hold, but a move above that would open the way for at least $3.15.

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The outlook for WTI Crude Oil is negative, but prices met crucial support at $63.4. This is a confluent wave projection for the January contract, and more importantly, is the 62 percent retracement from the perpetual low of $32.4 to $114.83. In addition, the KaseCD is oversold on the monthly chart. The importance of $63.4 indicates it is a potential stalling point, but there is little technical evidence so far to definitively call for a bottom. A sustained close below $63.4 will call for $49.7. Key near term resistance is $73.3.

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CL1


On October 1, 2014, Kase commented on a tweet, and posted the weekly chart shown below, regarding the decline of Hertz (HTZ). In that tweet, we stated that the decline from $31.61 was likely a corrective Wave IV of a long-term bullish five-wave formation. A week later, on October 8, we discussed the trade setup during our weekly chat session (minutes 16:50 – 21:00). At that point, the 38 percent retracement at $22.47 had been taken out, but we stated that for the five-wave formation to remain intact, the top of Wave I ($17.64), which was in line with the 62 percent retracement at $16.84, would need to hold. We also commented that we were watching the daily chart for bullish signals such as completed momentum divergences and oversold signals that would tell us the move down was possibly complete.

Figure 1 – HTZ Weekly as of October 1, 2014
HTZ Weekly 20141001

Fast-forward a few weeks later, and the next chart below shows that the move down stalled at $18.50 on October 15. The $18.50 swing low held the 62 percent retracement and top of Wave I as called for. A recovery has begun to take place, indicating Wave IV is likely complete and Wave V is underway. In addition, Wave IV ended up being a simple correction versus the Wave II correction. If you look closely at the details of Wave II you will see that it broke down into a complex five-wave, or nested three-wave correction. This is called the “rule of alternation”, which indicates one of the corrections will be complex and the other simple when a five-wave pattern is forming.

Figure 2 – HTZ Weekly as of October 28, 2014
HTZ Weekly 20141028

Table 1

Wave III met the intermediate (I, or 1.382) projection of Wave I, $1.55 – 17.64 – 7.80. This formation now has the potential to extend to $33.5 over the course of the longer-term (a few months or more). This is because Wave I projects to $33.5 as the larger than target (L, or 1.618). This is also the smaller than (S, or 0.618) projection for Wave III, $7.80 – 31.61 – 18.5. Most importantly, for this to be a textbook five-wave formation, at least two waves have to be equal. Rising to $33.5 would make Waves I and V nearly equal in size (Wave I = 17.64 – 1.55 = 16.09, Wave V = 33.5 – 18.5 = 15.0). If Waves III and V end up being equal, the move up would extend to $42.3. So over the course of the longer-term, as the probable Wave V extends, we now know that the potential for this move is $33.5 and possibly $42.3.

As we had discussed in our weekly chat session on October 8, once Wave IV was complete, we wanted to drop down to time a long entry on the daily chart. However, we needed to see evidence on the daily chart that the move down was likely complete. When dropping to the daily chart shown below, as of October 28, we can see that a bullish KaseCD divergence (red line) and KasePO PeakOut (green P) were confirmed at the $18.50 swing low, and that two subsequent buy signals (green and blue L) triggered. These are signals from our Kase StatWare indicator package and show that a trader may have established a long trade on the daily chart upon the second L (marked by the blue arrow) on October 20 at approximately $21.39. A stop would be placed at $19.07, which is DevStop3, or approximately 3.6 standard deviations of average True Range (ATR).

Figure 3 – HTZ Daily with Kase StatWare as of October 28, 2014
HTZ Daily 20141028

Traders holding this long position would now monitor the daily chart for exit and warning signals. One such warning signal was triggered by the gray K, which is a weak KCDpeak. Traders may have pulled stops into DevStop2 (second blue dot), and once the accompanying $22.60 swing high is overcome, the stop will be widened back to Dev3 (third, and largest, blue dot).

In addition to monitoring the daily chart, traders could also watch for a confirmed buy signal (L) on the weekly chart. This has not triggered yet, but once a buy signal forms on the weekly chart, a trader could scale the daily trade to the weekly chart, widen stops to DevStop3 on the weekly chart, and then monitor the weekly chart for exit and warning signals. The long signal on the weekly chart will warrant the added risk of holding a trade with wider stops on the weekly chart. This ‘scale up’ technique is useful for holding positions over longer periods of time and avoiding whipsaws. This technique also limits initial trade risk because the standard deviations of ATR (method used for Kase’s DevStops) on the daily chart are smaller than standard deviations of ATR on the weekly chart. Therefore, if the trade does not play out as expected, a trader can get out of the trade sooner on the daily chart, limit losses or preserve any gains, and live to trade another day.

At this point, we can also analyze the recent move up from $18.50 and look for important near-term resistance. When forecasting, we primarily rely upon confluence of Fibonacci wave projections and retracements. For instance, the smaller than (S or 0.618) projection for Wave 1/V, $18.5 – 22.6 – 20.77, shown in the chart and table below, is $23.5. This is confluent with the 38 percent retracement from $31.61 to $18.5 (magenta line). This then connects to $24.7 as the equal to (E, or 1.00) projection, which is near the 50 percent retracement. The intermediate target (I, or 1.382), is $26.6. This is also the crucial 62 percent retracement. Therefore, the wave projections for Wave 1/V, and the retracements of the decline from $31.61 to $18.5, show a cascade of targets that connect to one another.

Figure 4 – HTZ Daily with Retracements as of October 28, 2014
HTZ Daily Retracements 20141028

Table 2

What this indicates, is that $23.5 is an important near term resistance level. Currently, the move up from $18.5 is corrective of the move down from $31.61. Generally, a normal, profit taking correction, will hold the 38 percent retracement. However, because this is also the smaller than target, our studies show that meeting $23.5 will open the way for an extension to at least $24.7, the equal to target. A close over $24.7 would then call for $26.6, which is the key threshold for a bullish long-term outlook. This is because $26.6 is the 62 percent retracement and connects to $33.5 as the trend terminus. As discussed earlier, $33.5 is the larger than target for Wave I, and would make Waves I and V equal. Therefore, when all is said and done, the connection to $33.5, and completing the five wave pattern, is made through $23.5.

This analysis does not mean that HTZ will absolutely rise to $33.5. The move up may prove to be corrective, stall, and continue to decline. However, based upon the factors discussed above, the potential for $33.5 is present. The forecast is a road map for the near-term, and the StatWare indicators are the vehicle used to navigate the turns in the road. Each of the targets discussed is a potential stalling point for the move up, and levels at which traders holding a long position will want to closely monitor for exit and warning signals generated by their indicators, like divergences, PeakOuts, and KCDpeaks. If these types of signals trigger, then profit will be taken. Otherwise, the long trade will be ridden higher, possibly scaled to the weekly chart upon confirming buy (L) signals, and ultimately exited when an exit signal triggers on that chart.

These are just a few of Kase’s trading and forecasting techniques that can help make you a better, and more informed, trader. If you would like to learn more, join us for our free weekly educational chat sessions, take a trial of our trading indicators, and if you are an energy trader, take a trial of our weekly crude oil and/or natural gas forecasts.