Major Top in Nat Gas?

January 3, 2017 2:32AM CST

In last Thur's Technical Blog we advised traders to trail protective sell-stops to a much more conservative level just below Wed's 3.670 smaller-degree corrective low due to the historic level our RJO Bullish Sentiment Index has reached.  Today's collapse below this short-term risk parameter confirms a bearish divergence in momentum that obviously breaks the latest phase of this year's major reversal from 20-Dec's 3.290 low shown in the 240-min chart below.  But a number of ancillary factors contribute to a peak/reversal environment that could be major in scope that we believe warrants a shift to a broader bearish policy in the weeks ahead and while last week's 3.902 high remains intact as a resistant cap and new key risk parameter.

Natural Gas 240 min

Natural Gas Daily

In addition to the bearish divergence in admittedly short-term mo below 3.67 and the market's gross failure to sustain late-Dec gains above the past 2-1/2-months' high ranging from 3.758 to 3.676 shown in the daily chart above, the factors below are compelling when building a broader peak/reversal-threat case:

  • late-Dec's rally from 3.290 spanned a length exactly 61.8% (i.e. 0.618 progression) of Nov/early-Dec's preceding 2.766 - 3.758 rally suggesting
  • the entire Nov-Dec rally is a complete 5-wave Elliott sequence as labeled amidst
  • the HIGHEST RJO BULLISH SENTIMENT INDEX IN 14 YEARS!

This final point may be the most damning evidence of a peak/reversal environment that could be major in scope now that the market has rejected/defined a specific high and risk parameter from which non-bullish decisions like long-covers and new bearish punts can be objectively based and managed.  At a whopping 74% that reflects 268K Managed Money long positions against just 94K shorts, our RJO Bullish Sentiment Index has not been seen since Feb 2003 and warns of a vulnerability to lower levels until and unless the market resurrects this year's major uptrend with new highs above 3.902.

An alternate longer-term bullish argument can still be made since the market has yet to break 20-Dec's larger-degree corrective low and long-term risk parameter at 3.290, especially given today's very obvious gap-down opening that is unusual so early in a peak/reversal process without being "covered".  We believe the next bit of directional evidence will come from the MANNER in which this market tries to recover from the past few days' plunge.  If a broader peak has been established and the new trend is down, then recovery attempts will be expected to unfold in a 3-wave, labored, corrective manner.  If, alternatively, a broader uptrend remains intact, then the market would be expected to rally in a trendy, impulsive way similar to Nov/early-Dec's rally and late-Dec's rally from 3.290.

Natural Gas Active Weekly

Natural Gas Monthly

The monthly log scale active-continuation chart above puts this year's rally into historical perspective.  2016's 142% rally has truly been impressive.  But it would have had to rally to the 5.500-area to be as impressive as 2012-14's 1.902 - 6.493 rally that proved to be a major BEAR MARKET CORRECTION.  This monthly perspective also shows the last time our RJO BSI tripped 74% in Feb 2003:  the market suffered a 7-month, 63% correction within the context of a secular bull market.  Currently, a secular BEAR MARKET remains arguable.

It's virtually impossible to forecast a level to which this market might fall even IF we're correct on this peak/reversal-threat call.  What we determine with specificity however is where this market should NOT trade per such a broader peak/reversal threat environment:  above 3.902 .

Against this peak/reversal-threat call in nat gas we'd also like to address how this might co-exist with our still-very-bullish calls in crude oil, heating oil and RBOB.  The monthly log scale charts below show nat gas overlaid against crude oil as well as the correlation between the two.  Like comparisons of most markets, the correlation between crude and nat gas is sporadic at best.  It's easy to find conditions and periods in which they're in lock-step, but equally easy to find periods of no correlation whatsoever.  Per such it would be a mistake to conclude higher nat gas prices simply because crude oil remains in a major uptrend and is expected to continue higher.

These issues considered, shorter-term traders with tighter risk profiles have been advised to move to a neutral/sideline position as a result of today's sub-3.670 mo failure and are further advised to first approach recovery attempts to the 3,71-area OB as corrective selling opportunities with strength above 3.902 required to negate this call and reinstate this year's major uptrend.  Longer-term players have been advised to pare bullish exposure to more conservative levels jettison the position altogether on EITHER a failure below 3.29 or a recovery to 3.71, also with subsequent strength above 3.902 negating this call.

Natural Gas Monthly

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