Natural Gas - Expanding triangle

Fri, Feb 5, 2010 - 12:00am

This is an extract of our Special Report Natural Gas just published.

Elliott Wave Theory is based on the psychology of the masses which forms patterns. I use these patterns as well as the general sentiment in my forecasting. In addition, I take into consideration the behaviour of the commercial traders.

Natural Gas completed its long term decline in an "ending diagonal" in September 2009. The structure is revealed in this daily chart of Natural Gas from 11th of September 2009:

All charts in this article courtesy of Stockcharts.com.

A 3 year weekly chart gives perspective of the decline in wave "C" of "X" over the last couple of years. It looks like a relatively clear 5 wave decline:

Natural Gas has completed a wave 1 rally up from September 2009 and is currently in a wave "2" correction.

Alternative scenario

The structure may divide into a larger triangle that we would label as a "4th" or "B" wave which could be completed within several months. The next should then be a final "5th" or "C" wave down.

A weekly long term chart reveals a multi year expanding triangle.

The following weekly chart dated the 5th of February 2010 shows the multi year expanding triangle of natural gas:

If we assume that wave "c" of B of (x) ended in September 2009, the price target for a full C of (y) wave in the expanding triangle would be USD 24 - 39 long term. This should then take many years to complete.

Natural Gas / Gold Ratio

Natural gas turned up long term relative to gold in early September 2009 and has outperformed gold since then. This was the lowest relative value to gold for decades.

The Natural Gas Stock Index/Natural Gas Ratio

The natural gas stock index topped long term relative to natural gas commodity at the beginning of September 2009. The slower Full STO is currently on a long term "sell signal". We therefore do not consider natural gas stocks as a good investment as investing directly in the natural gas commodity.

UNG with long and intermediate Elliott Wave count.

UNG is a proxy for natural gas and simulates this commodity. Since natural gas is declining in a wave "2" correction, more downside is possible for UNG.

Weekly chart of UNG

Notice that UNG has declined more than natural gas itself because UNG simulates the natural gas price using options and futures. This makes UNG more suitable as a trading vehicle than a long term investment.

You can use UNG to go long Natural Gas when the final wave of the wave 2 correction is completed in natural gas.

Conclusion

Avoid shares in natural gas companies because they seem to follow the general stock market more than they follow the price of Natural Gas itself. The right time to buy them would be at the next major stock market bottom. Natural Gas' current decline in wave 2 is creating an opportunity that should not be passed.

Copyright © 2010 Geir Solem

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