Although natural gas bounced off the previous lows, the risk of another downswing has not decreased. Why?
Will the pattern return?
The last few weeks have not been good for the buyers. The bears showed their claws, and deprived the bulls of valuable allies and questioned the signals coming from the indicators.
So, what can we expect in the upcoming sessions? Will the pattern that we could observe many times on the long-term chart return? What could this lead to?
Let’s start today’s analysis by quoting the last article containing natural gas analysis:
(…) recent sessions were completely dominated by the bears and the price fell to (…) the green supportive gap (1.80-1.86), which serves as the key support for the bulls.
At this point, it is worth nothing, that the first test of this support took place in Sep.2020, but as you see on the long-term chart, it withstood the selling pressure and triggered a rebound, which resulted in further improvement in the following months. Therefore, taking into account the fact that history tends to repeat itself, it seems that we could see a similar price action in the near future (even if the bears test the lower line of the gap first).
From today’s point of view, we see that the situation developed in accordance with the previous pro-declining scenario, and the bears tested the above-mentioned target.
As it turned out, the pressure of the sellers was very strong, and the bulls didn’t manage to stop them in the space of the green supportive gap, which translated into further deterioration in the following sessions.
Thanks to the bears’ attack the price dropped under the gap and tested the next green support zone created by the Apr. 2020, Jun. 2020 and Jul. 2020 low, hitting a low of 1.52 for the third time in a row.
How did this price action affect the medium-term chart? Let’s examine the weekly chart to find out.
From this perspective, we see that the recent declines took natural gas to the lower border of the long-term red declining trend channel, which in combination with the above-mentioned green support zone caused a rebound earlier this week.
As a result, a big white candlestick appeared on the chart, but did it change anything in the broader perspective?
In my opinion, not really, because despite the recent upswing, natural gas is still trading under the red gap created at the beginning of the previous week.
Additionally, the volume (yup, the week is not over yet, and much can happen during today’s session) is quite small so far, which doesn’t look encouraging – especially when we factor in the current situation in the short term.
Let’s take a look at the daily chart below.
Looking at the daily chart, we see that the recent “rebound” actually is a big jump, and it’s mostly caused by the green gap (1.58-1.79) formed at the beginning of Wednesday’s session.
Thanks to this price action, the bulls pushed the price even higher, but as you see, the size of the upward move is very small compared to the previous decline (it only reached to the 38.2% Fibonacci retracement based on the last downward move).
Additionally, the recent upswing didn’t even close all the red gaps that were formed since the beginning of the month (the red gap from Feb.9 continues to serve as the nearest resistance), which, in my opinion, doesn’t bode well for the bulls – especially when we factor in yesterday’s pullback.
What the bulls have on their side?
Buy signals generated by the daily indicators.
But can we trust them now?
Well… taking into account the fact that they remain in their oversold areas since late-Jan. and their earlier “buy signals” didn’t bring improvement and turned out to be false swallows that didn’t bring spring, I think it is not a good idea to rely only on their “opinion”.
So, what can we expect?
Taking into account the earlier price action that we could observe on the long-term chart, it seems that another move to the downside may be just around the corner.
Why?
Firstly, the size of the rebound is quite tiny and… we have already seen a correction of the upward move before it could change anything - even in the short term (not to mention the medium or long term).
Secondly, the red gap from the previous week (marked on the weekly chart) is open, and the volume seems to be disappointing – taking into account the size of the white candle.
Thirdly, and actually the most importantly, as you see on the monthly chart, many times in the previous years the bulls were not able to protect the previously formed bottoms.
We saw such weakness in:
- Jan. 2012 - the previous bottom from Sep. 2009 didn’t withstand the selling pressure, which translated into further deterioration in the following months and a fresh multi-month low in Apr.2012
- Dec. 2015 - just like in the previous case, the bulls failed and let their opponents to push temporary the price below Apr. 2012 low, which caused another attack and a fresh multi-month low in Mar. 2016
- Mar 2020 - once again, history repeated itself and breaking the previous low (from Mar. 206) encouraged the bears to attack again, which led to the declines deepening and a fresh low in Apr. 2020
Another test of this low we could observe in Jun. 2020, but this time the bulls were strong enough to protect their ally, which translated into a significant upward move in the following months.
Will we see another successful defense of previous lows in the coming days or weeks?
It’s quite likely – especially if the buyers manage to withstand the selling pressure and protect the green gap (marked on the daily chart) formed on Wednesday.
What could happen if they fail?
We’ll likely see another test of the recent low and if the buyers are not sufficiently determined, we will probably see a repeat of previous years and deepening declines, as well as the formation of a new long-term bottom.
Where?
Probably at around the purple declining support line based on the previous lows (marked on the monthly chart).
Therefore, connecting the dots, it is very important to carefully watch each subsequent move of market participants because any weakness of the bulls will certainly be exploited by their opponents to return to the continuation of the old pattern (described above).
Summing up, on Wednesday, the green supportive gap appeared on the chart, encouraging the bulls to fight. Despite this improvement, they were disappointed, which translated into a pullback during yesterday’s session. Taking this fact into account and combining it with the open red gap (marked on the weekly chart) and the pattern from the previous years, which was effectively used by bears it seems that (at least) a test of the lower border of the green gap is just around the corner. If the bulls fail in this area, the probability of the test of the recent low will be even more than likely.