Is Natural Gas a Complete Failure? / Commodities / Natural Gas

Thanks to the last week’s declines,natural gas lost 32% and approached the support area. What are theimplications?

Major Declinein Natural Gas Prices

Last week, natural gas recorded itsbiggest decline in months. Could this have been predicted? What technicalfactors encouraged the bears to attack? What changes did this movement leavebehind on the chart? You will find answers to these questions in today'sarticle. Have a nice read!

Let’s start today’s analysis with thequote from thelast commentary on natural gas published on Jan. 12:

(…)From this perspective, we see that the recent upward move took the price to thepreviously broken lower border of the green rising trend channel, which looks(at least at the first glance) like a verification of the earlier breakdown.

Althoughwe saw a temporary move above this line, the bulls failed to hold it, whichmeans that the outcome of today’s session may bring a significant breakthroughfrom a technical point of view.

Whatdo I mean by that?

Ifthe buyers manage to close the week above this key line, the breakdown would beinvalidated, which could translate into further improvement. (…)

Onthe other hand, however, if they fail and natural gas closes the week underthis line, the probability of a reversal and lower prices in the coming weekwill significantly increase. Therefore, keeping an eye on today's behavior ofmarket participants can provide us with important and valuable insights fornext week.



On top of that, there were also othertechnical factors that didn't bode well for bulls and higher prices:

(…)On Jan. 4 and Jan. 8, natural gas opened sessions with another 2 green gaps,which resulted in a move above the 50% Fibonacci retracement based on theentire Oct.-Dec. downward move. On the following day, a huge white candlestickwas formed (on the highest volume in weeks), and the bears lost two otherallies: the red gap formed on Dec. 27, 2023, and the 61.8% Fibonacciretracement.

(…)this upswing took the price to the biggest red gap created during Oct.-Dec.declines, which translated into a pullback. For the first time in many days,the bulls failed against resistance.

Thisfailure took natural gas below the previously broken 61.8% Fibonacciretracement, invalidating the earlier breakout. Yesterday, there was anotherunsuccessful attempt to break above it, which doesn’t look encouraging.

Additionally,the RSI generated a sell signal for the first time since mid-October. Backthen, such development preceded a deeper correction, which suggests that wecould see something similar in the coming days – especially when we factor inthe current position of the CCI and the Stochastic Oscillator: the first ofthem remains in its overbought area, increasing the probability of a sellsignal in the very near future, while the latter generated a sell signal,giving the bears green light to attack.

Ontop of that, the volume, which accompanied yesterday’s upswing was visiblylower than the day earlier (during decline), which raises some concerns aboutthe condition of the bulls.

Confirmation ofBearish Trend

From today’s point of view, we seethat although the bulls tried to cross the lower border of the green risingtrend channel, this very important resistance line withstood the buyingpressure, which, in combination with the above-mentioned big red gap (and otherdisturbing technical factors) triggeredthe pro-declining scenario just as expected.

As you can see on the daily chart, thisshows the buyers’ weakness resulted in another big red gap at the beginning ofthe previous week, which resulted in further deterioration that took the pricebelow the 50% Fibonacci retracement (based on the previous upward move).

Although the bulls tried to savethemselves, a loss of an ally (supporting green gap created on Jan.8) togetherwith one more red gap (formed on Jan.17) and a breakdown under the lower borderof the orange consolidation lured the bears to the trading floor once again.

Thanks to their other attack, the priceapproached the 61.8% Fibonacci retracement and the 200-day moving average,which could cause further declines. However,the earlier clearly visible bulls’ weakness, in combination with two more redgaps, the breakdown under the lower line of the mentioned consolidation, abreakdown under the 50-day moving average, and sell signals generated by theindicators were still on the bearish side, which did not bode well for stoppingthe decline – especially when we take into account the size of red candles and thebearish engulfing pattern, which appeared on the chart on Jan. 18 (I markedit with red ellipse).

This cocktail of negative technicalfactors contributed to another strong decline and a realization of thepro-declining scenario based on the earlier exit from the orange consolidation(as a reminder, according to the rules of technical analysis, a drop below thelower border of the formation triggers a downward move to a level thatcorresponds to at least the height of consolidation) during the last session ofthe previous week.

Thanks to this decline the bears took theprice to the mid-Dec. lows, but what’snext?

On one hand, this support could trigger arebound, however, taking into account all the above-mentioned bearish factors,the sell signals generated by the daily indicators, and the fact that naturalgas lost 32% in the previous week, it seems more likely that we’ll see furtherdeterioration and a test of the next support area (2.136-2.206) based on June2023 lows (marked with green on the first chart) in the coming week.

At this point, it is worth noting that ifthe bulls fail once again, the road to the early-May 2023 or even mid-April2023 lows could be open.

Nevertheless, please keep in mind thatthe volume that accompanied recent declines neither grew from session to sessionnor was huge (or at least large enough to confirm the growing strength of thebears), which raises the first doubts as to whether the southward movement willcontinue as strongly as last week.

Therefore, in my opinion, carefulobservation of the behavior of market participants seems to be the best idea atthe moment.

Summingup, the clearly visible weakness of the bulls inthe middle of the month turned out to be downright tragic for them last week.The bear attack led to the strongest decline in many months and erased all theprevious upward movement that we could observe from mid-December tomid-January. The volume accompanying this downward move raises some concernsabout the strength of further declines, but a multitude of bearish technicalfactors suggest that we’ll likely see a test of the next support(s) in thecoming week(s).

If you’d like to know what the currenttechnical picture of crude oil is or to find out what arguments the bulls haveor what allies do the bears have, I encourage you to subscribe to Oil TradingAlerts, where you’ll find the answers to these (and many other)questions.

See you tomorrow.

Thank you.

AnnaRadomski

Founder, Editor-in-chief

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