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Natural Gas Prices Remain Volatile, Traders Ask, "What's Next?"

Natural Gas Prices Remain Volatile, Traders Ask, "What's Next?"

2014-02-10 18:36:00
Research, Research Team

Very rarely does the price of a commodity swing as much as that of natural gas has over the past 14 days. Luckily for us, the volatility has offered up some clear technical opportunities.

Key Takeaways:

  • Natural gas is very volatile at the moment due to shortage concerns.
  • Price is currently at the low of a two-week range.
  • A break below current levels could indicate a medium term decline.
  • Both stochastics and CCI suggest an upside correction.

With cold weather and natural gas shortages causing concern across the U.S., the price of natural gas has had an extremely volatile two weeks. Having entered into the last week of January at around 5.45, fresh off the back of close to 30% gains, natural gas prices dropped to around 4.80 during Monday's and Tuesday's trading. Wednesday to Friday saw this drop reverse, rise to highs, reverse again, and fall back below Tuesday's lows. The first week in February mirrored this volatile action, with Monday to Wednesday's gains seeing natural gas prices reach 5.73, before closing the week back down at 4.77. Going into next week, what can natural gas traders expect?

4 Hour Natural Gas Price Chart

natural-gas-prices-remain-volatile-news-0003_body_Image5.jpg, Natural Gas Prices Remain Volatile, Traders Ask, "What's Next?"

Take a look at the four hour chart above. At this scale, the range is clear.Natural Gas prices have not closed below range support around 4.750 since January 22nd, and if they do so during the next week of trading, this could indicate further declines. A close below this level would put an initial target between 4.47-4.50, a level from which price has reversed a number of times in the past, but keep an eye on the 200 period moving average. Many institutional and retail traders look to this long term moving average as a trend indicator, so when the price reaches it, it will often act as support or resistance. For natural gas prices to reach the 4.50 target it will likely need to break the 200-day moving average, so expect some temporary friction (perhaps a short term upside reversal) if it does. Further supporting the downside bias is the bearish pin bar (highlighted) that formed during Friday's session. A bearish pin bar can indicate seller strength and traders often expect selling strength to carry across the next session, making it a sell signal.

Having said this, a look at the stochastic indicator offers up a reverse scenario. The stochastic indicator measures momentum in a market, and among other things, can help traders identify levels at which an asset might be overbought or oversold. If the stochastics are below 20, this can indicate an oversold asset that might be due for an upside correction.

A look at these technicals tell us that natural gas is currently oversold. In addition, the commodity channel index (CCI) indicator supports this bias. The CCI indicator also indicates oversold and overbought assets, but can also be used for timing entries. When the CCI reading crosses above the -100 level, this can be an indication that the upside correction might be about to commence. The CCI reading is currently at -103, so not quite a buy signal, but close. A small natural gas price rise over the next few sessions would likely see the -100 break. These indicator readings suggest one of two things could happen.

First, that natural gas prices may be due for a short term, upside correction before resuming their downtrend and breaking out of their current range. Second, that the price of natural gas might find support at its current level (as it has done on numerous occasions recently) and reverse to the upside. In this bullish scenario, keep an eye on the 5.00 flat level. While, as of late, the volatility seems to have rendered it somewhat insignificant, it is a strong psychological level and for purely technical reasons, might serve up some temporary resistance. If natural gas prices do manage to break through this level, the initial target would be resistance at 5.43-5.46 and, beyond that, previous highs just below 5.75.

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