Natural Gas Consolidating near the 200-Day Moving Average

In our 6/21/13 Energy Alert, we stated natural gas was nearing completion of the pullback we predicted as it declined to the 200-Day Moving Average. We explained the 200-Day Moving Average is the long-term indicator of trend, and based on long-term cyclical patterns the 10-year low reached in the spring of 2012 was likely the end of a four-year bear market, and we are now in the early stages of a bull market similar to the bull market of 2002 to 2008. During bull markets long-term trend followers utilize pullbacks towards the 200-day moving average as hedging opportunities.

As you can see in the 2 year chart of natural gas below, on 6/26/13, natural gas reached the 200-Day Moving Average and over the last 30 days has consolidated near this important long-term trend indicator.

The question is after testing the 200-Day Moving average where do we go from here? The first point to emphasize is we believe natural gas and electricity are in the early stages of a long-term bull market. On our Historical Data page (click here), we discuss Natural Gas and Electricity prices from a cyclical and historical perspective. After reading this material you will understand present cyclical and historical price patterns support the premise that we are in the early stages of a long-term bull market and the upside risk in prices is substantial at this time.

Therefore, we continue to recommend utilizing pullbacks towards the 200-Day Moving as a buying opportunity. Also, we should anticipate pullbacks to the 200-day Moving Average will be characterized by accumulation patterns. What are accumulation patterns? Let’s again look at the 2 year chart of Natural Gas below.

Natural Gas chart 2
After reaching a 10 year cyclical low in the spring of 2012, natural gas rallied and broke above the 200-Day Moving Average early in Jul 2012. The rally continued for a month before its 1st pullback in the middle of Aug 2012. Over the next 30 days natural gas consolidated close to the 200-Day Moving Average before starting its next leg up. The next rally continued until late Nov 2012 before its 2nd pullback towards the 200-Day Moving Average in early Jan 2013. The second consolidation period lasted 45 days before starting its next leg up.

We realized early in April this rally was becoming overextended, therefore, we stated in our 4/6/13 Energy Alert a short-term pullback would begin within 30-45 days. The pullback began as anticipated early in May leading to the 3rd pullback shown above, which as of this writing has lasted 30 days. This latest consolidation pattern should be resolved in the near future, and resume its long-term trend higher. The trigger could be a storm enters the Gulf of Mexico or an extended period of warm weather in the high usage areas of natural gas and electricity.

It is important to note the forecasts for early August are calling for milder than normal weather in the high usage areas; therefore, natural gas could have a downside break of the consolidation pattern and trade below the 200-Day Moving Average. Would a downside break negate our premise of being in the early stages of a bull market? Not at all! A downside break would not change the long-term cyclical and historical price patterns of Natural Gas and Electricity. Bull markets are marked by periodic breaks of the long-term trend, but the time spent below the long-term trend is short lived and should be considered as hedging opportunities.

Not every client’s risk tolerance and hedging strategy is the same, but we trust the above report will help you put into perspective the risk/reward opportunities at this time. We invite you to call one of our energy analysts to help you plan a hedging strategy appropriate for your situation.

Ray Franklin
Senior Energy Analyst