Nat Gas Poised for Interim Rebound That Could Be Sharp

January 12, 2017 8:29AM CST

In last Fri's Technical Blog we identified that day's 3.358 high as the latest smaller-degree corrective high and short-term risk parameter the market needed to sustain losses below to maintain a more immediate bearish count.  The market's overnight recovery above this level, as scant as it is thus far, CONFIRMS a bullish divergence in momentum that defines Mon's 3.098 low as the END of a textbook 5-wave Elliott sequence down from 28-Dec's 3.902 high.  In this regard 3.098 becomes our new short-term risk parameter from which non-bearish decisions like short-covers and cautious bullish punts can be objectively based and managed.  And given the extent and "obviousness" of late-Dec/early-Jan's collapse as, we believe, just the initial decline if a major peak/reversal process, the corrective rebuttal to this collapse could be extensive.

Natural Gas 240 min

Taking a step back we'd like to remind traders of what we believe to be a major PEAK/reversal environment from 28-Dec's 3.902 high.  This long-term bearish count is predicated on:

  • a confirmed bearish divergence in daily momentum below 20-Dec's 3.290 low
  • an arguably complete 3-wave Elliott sequence from Mar'16's 1.611 low
  • the rally from 20-Dec's 3.290 low spanning an exact 0.618 progression relationship to Nov-Dec's preceding 2.766 - 3.758 rally and,
  • the highest bullish sentiment reading in our RJO Bullish Sentiment Index since Feb 2003!

It is this last, historically frothy bullish sentiment factor that is the most incriminating and warns of a tremendous vulnerability to lower levels as long as 28-Dec's 3.902 high remains intact as a resistant cap and key risk parameter.  Nonetheless, peak/reversal PROCESSES often times include EXTENSIVE (2nd- or B-Wave) corrective rebuttals, especially when the initial counter-trend break is as steep, relentless and obvious as early-Jan's break has been.  In the 240-min chart (top) we note the 50% and 61.8% retraces of the recent 3.902 - 3.098 decline cutting across at 3.500 and 3.595, respectively.  A corrective rebound and ultimate selling opportunity to recover beyond these retraces, and quickly.

Natural Gas Active Weekly

The monthly log scale active-continuation chart below shows the last time the RJO Bullish Sentiment Index was this frothy:  Feb 2003.  The market went into a steep, violent correction within the context of the secular bull trend at the time.  The current overzealous bullish sentiment comes within a still-arguable secular BEAR market and the prospect that the recovery attempt from Mar'16's 1.611 low may only be a correction.  It's also interesting to note that late0Dec's 3.902 high is only a nickle away from the (3.852) 38.2% retrace of the entire 10-year bear market from Dec'05's 15.78 high to last Mar's 1.611 low.

These issues considered, traders are advised to move to a neutral-to-cautiously-bullish policy from current 3.324-area prices with a relapse below 3.098 required to negate this call and reinstate the developing downtrend.  In lieu of such sub-3.098 weakness we anticipate a corrective rebound that could be extensive (i.e. to 3.60 or higher) and ultimately present a risk/reward opportunity from the bear side that could span months and even re-expose the secular bear to new lows below 1.611.

Natural Gas Monthly

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