Natural gas futures (NGX13.NYM)
have experienced a solid rally since the September low of 3.402, but a selloff could be ahead. As a matter of fact, it may have already begun.
The daily chart shows price has been testing a low volume node (LVN) at 3.875, which has become a significant resistance level in the chart.
In fact, the 3.875 level has been in play all year, as it had been support the first half of the year, and resistance ever since. Nat gas has banged on 3.875 three days in a row, and is now showing signs of an impending selloff.
First, the daily chart shows a bearish outside day pattern has formed, whereby the current session's high surpasses the prior day's high, and the current session's close price is below the prior day's low. This pattern signifies failed range expansion above, which usually sparks a selloff, as we saw into Wednesday's close.
Forming the bearish outside day pattern off a rejection at the significant 3.875 LVN offers further clues that selling could be intensified.
Also, the current three-day price range is the smallest of the last 10 days, and is also 33% smaller than the average three-day range. Both of these stats imply a breakout and range expansion ahead, regardless of direction. As a matter of fact, a confirmed break through resistance at 3.875 would likely spark a major rally, as buyers put the squeeze to the bears.
The game plan for natural gas
An aggressive approach would be to sell a pullback within the current trading range between 3.80 and 3.85. A confirmed approach would be to sell a break through 3.75. And a safe approach would be to sell a pullback to 3.75 after a confirmed break down prior to the retest.
The primary downside target is 3.65, which is both the composite volume point of the control (CVPOC) and prior resistance. A scaling point would be at monthly VWAP at 3.69, and the home run target is the last line of support at the 3.485 LVN.
Should an upside break occur, look for price to rally to the 3.941 to 3.975 zone.