One of my favorite things about technical analysis has to be the whole principle of polarity. This study of supply and demand is the beginning of all of my analysis. When prices keep bumping up against a specific price, we know that with each test, there are less and less sellers. Eventually, when sellers dry up (after enough tests), the buyers take over control at that level and prices shoot up. The same thing can be said about support. The more times support is tested, we know there are less and less buyers down there. This is simply due to the fact that at some point, anyone willing to buy at that level has already made their purchase. So when the buyers dry up (after enough tests), sellers take control and prices fall hard.
Today, let’s focus on the key resistance in Natural Gas. Again, the more times a level is tested, the higher the likelihood that it breaks. Why? Because with each test, in this case about $3.87, there are technically less and less sellers willing to sell at that level? Why? Because more and more sellers willing to sell up here have already sold.
Here is a daily chart of Natural Gas showing this to be the 4th attempt to get above this key resistance level since July:
Something else that I think is worth pointing out is the significance of this level. The sellers have consistently been defending the 50% retracement of the April to August decline. Regardless of whether you’re using absolute highs and lows (red), or closing prices (blue), the range of this resistance is about the same. To me this is a monster level.
The bad news for the natural gas bulls is that prices have shot up hard as we currently approach this price. This makes it much more difficult to break through, and quite frankly a breakout would be less reliable. The good news however, is that this is test #4. But more importantly we have a nice little shakeout, or false breakdown, early in November that could be that catalyst to take prices through this resistance.
If and when these levels are taken out, the polarity mentioned above starts coming into play. If we get through, we know the sellers have dried up and the buyers are now in control. Therefore, any future retests of this level should be met with buyers.
Either way, I think this action in Natural Gas is extremely constructive. And for now, I’d rather err on the long side. I don’t have a position yet, and as of right now I’m not sure where the entry point is. But this is something definitely worth watching. Perhaps a retest of the 200 day moving average could be the first entry? Maybe a few closes in the 3.90’s could be confirmation. Or possibly the breakout and retest of support. I’m staying very open-minded with this one and really just taking it one day at a time…
Go get ’em
Tags: $NG_F $UNG $UGAZ