Will Natural Gas Bounce?

Natural gas is the lone wolf of the commodity world, setting out on its own course while for the most part ignoring what the rest of the capital markets are doing. Short-term traders are often drawn to the high volatility of the nat gas market, rising and falling by greater degrees than just about any other commodity.

From the low in April, natural gas has risen nearly 70%, even taking into account the recent bout of weakness that’s forced the commodity to fall nearly 15% since mid-November. But recently we’ve seen the United State Natural Gas Fund ETF ($UNG) fall to a support line that’s been created off the April and June lows. Ideally we’d like to see a trend line tested at least three times in order to gain greater confidence in its ability to hold, but so far we’ve seen a slight bullish bounce in $UNG off the trend line that sits near $18.50.

Turning our focus to momentum we have one of my favorite indicators, the Money Flow Index (MFI) breaking down to a historically oversold condition. From a break below 20 we look for one of two things to occur. 1. a bounce from being oversold as buyers step in immediately and 2. price gives us a false break of the trend line and puts in a positive divergence in momentum that takes $UNG higher. These of course are not the only possibilities that could play out, but one of these are what natural gas bulls will likely be hoping to happen.

As I mentioned in the second option for the MFI indicator, we could see a break of the trend line. If this happens we obviously won’t be able to tell if it’s a false break until price action plays out and $UNG rises back above support. On a break we can look at volume and tell if it occurs on a heavily selling which would give a credence to further weakness or on light volume which would support the notion of a false break.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+.