Natural Gas Price Action: Due for a Rebound?

Natural Gas, NG – Price Outlook:

• Positive divergence and stretched sentiment suggest the slide in natural gas is losing steam.
• Possibility of a minor rebound in natural gas.
• What are the signposts to watch?

NATURAL GAS TECHNICAL OUTLOOK: NEUTRAL

Slowing downward momentum and stretched sentiment suggest the multi-month-long slide in natural gas prices could soon reverse.

Natural gas failed to sustain the rebound in late February, falling over 20% in March. See “Natural Gas Price Action Setup: Is This It?”, published February 28, highlighting the risk of a renewed decline. Natural gas is now testing quite a strong cushion at the February low of 1.97. A positive momentum divergence on the daily and weekly charts (ascending Relative Strength Index associated with a double bottom in natural gas) is a sign that the seven-month-long slide is losing steam. Moreover, the colour-coded daily candlestick charts show the most recent leg lower (from early March) is consolidation within the downtrend, and not the start of a fresh leg lower.

Natural Gas Daily Chart

Chart Created by Manish Jaradi using Tradingview

Moreover, market diversity as measured by fractal dimensions appears to be low as natural gas retests multi-month lows. Fractal dimensions measure the distribution of diversity. When the measure hits the lower bound, typically 1.25-1.30 depending on the market, it indicates extremely low diversity as market participants bet in the same direction, raising the odds of a price reversal. For natural gas, the 65-day fractal dimension is currently around 1.25, flashing a red flag. (See chart.)

Natural Gas Daily Chart

Chart created by Manish Jaradi using Metastock

The odds appear to be rising for a retest of at least the early-March high of 3.03. Any break there would trigger a minor double bottom (the February and March lows), potentially opening the way toward 4.00. To be sure, a rebound is not imminent, that is, a drop below 1.97 can’t be ruled out. Such a fall could clear the door toward the 2020 low of around 1.45, also the target of a major double-top pattern (the 2022 highs) triggered at the end of last year.

Natural Gas Weekly Chart

Chart Created by Manish Jaradi using Tradingview

However, from a risk: reward perspective, the bar for further downside is rising. Moreover, from a broader perspective, the odds are high that the multi-month decline in natural prices is overdone. See “Natural Gas Price Action Setup: Is the Slide Overdone?”, published February 21.

Natural gas is down in March as milder weather forecasts and rising output have overshadowed continued disruptions to French energy networks. However, colder-than-normal temperatures are forecast to spread across much of Europe in early April, and reports that demand is beginning to tick up given the sharp decline in prices in recent months. With supply worries mounting with protests in France, natural gas prices could be supported. Still, with Europe gas storage well above five-year averages, natural gas could find it tough to rebound on a sustainable basis.

— Written by Manish Jaradi, Strategist for DailyFX.com

— Contact and follow Jaradi on Twitter: @JaradiManish