The natural gas futures contract has turned higher for the first time since November 2018, setting the stage for a seasonal rally that could reward well-timed long positions. It's even possible that this beaten and battered commodity has finally bottomed, carving a higher low that may eventually complete a multi-decade basing pattern. Just keep in mind that a larger-scale breakout could take another three to five years to complete, at a minimum.
August marks the start of a seasonally positive period for natural gas, with the bullish bias continuing into the winter months. Colder-than-expected winter temperatures can extend this traditional uptick, while warm and sunny days bring selling pressure into the mix. Given these weather catalysts, it makes sense to keep expectations in check, taking opportune profits when resistance levels are reached.
Natural Gas Long-Term (Continuous) Chart (1991 – 2019)
The natural gas future chart looks more like the S&P 500 Volatility Index (VIX) than a physical commodity, with a series of parabolic spikes and broken bubbles going back for decades. The contract posted narrow price action through the 1990s, generating resistance near $3.40 that broke at the start of the 2000 to 2002 bear market. The rally peaked near $10.00 at the end of 2000, while the subsequent downturn cut through new support after the Sept. 11 attacks in 2001.
The contract entered a persistent uptrend in 2002 at the same time that crude oil was starting its historic rally and gained ground in two large buying impulses that ended at $11.90 in 2003 and an all-time high at $15.78 in 2005. It collapsed in 2006, dropping to $4.00, and turned higher once again into the summer of 2008. The subsequent peak at $13.70 marked the highest high in the past 11 years, just before the economic collapse took hold around the world.
A series of lower highs persisted into 2016's 21-year low at $1.611, with selling pressure easing at the same time that commodities around the world were wrapping up a major downtrend. The subsequent recovery wave unfolded in two buying impulses that stalled near $5.00 in the fourth quarter of 2018, giving way to a persistent decline that may have ended at a two-year low in August 2019.
The monthly stochastics oscillator crossed into a long-term sell cycle from the overbought zone in November 2018 and reached a deeply oversold level that triggered bullish crossovers in 2001, 2006, 2009, and 2015. It has now crossed into a buy cycle, but performance in previous iterations has been erratic, so the value of this turnaround is questionable, unless supported by other technical measurements or retracement levels.
Natural Gas Short-Term (Continuous) Chart (2016 – 2019)
A Fibonacci grid stretched across the 2016 into 2018 recovery wave places the August low under the critical .786 retracement level, while price action into September has remounted broken support, which has aligned with the 50-day exponential moving average (EMA). The contract has now reached resistance at the 200-day EMA, which was broken forcibly in January 2019, telling market players to expect a reversal that tests new support near $2.30. A bounce at that level in the next four to six weeks could set off fresh buying signals.
Looking ahead, this natural gas uptick could fill the January 2019 gap between $3.35 and $3.45, crossing above the 50% retracement of the 2018 into 2019 selling wave. That price action would also bring the rally close to 2016 and 2018 intermediate tops between $3.80 and $4.00. It isn't wise to hold onto long positions near those price levels, but a breakout, if it does unfold, will greatly improve the technical outlook for this battered commodity.
The Bottom Line
Natural gas is engaged in as seasonal rally that could post greater-than-expected upside in coming months.
Disclosure: The author held no positions in the aforementioned securities or their derivatives at the time of publication.