It's understandable if financial bargain hunters are salivating over natural gas. The energy commodity has plunged nearly 26% from its October closing high. Natural gas futures have already dipped to $2.54 per million British thermal units, before bouncing in the last few days, including a rally yesterday that took the commodity up nearly 5%.
So is now the time to dive in? To find out for Tuesday's "Mad Money," Jim Cramer's CNBC show, he spoke with the one person who predicted the latest downdraft: Carley Garner, a technician and commodities expert who is a colleague at Real Money and co-founder of DeCarley Trading.
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Garner is convinced that natural gas won't hit a solid bottom from which it can consistently rise until two things happen: It drops to $2.50 and a ceiling of price resistance around $3.02 or $3.15 disappears.
With that in mind it's important to see that the price - which hasn't hit $2.50 yet - is headed up because of something called "contango," she says. That's a term that describes how the spot price of a commodity is cheaper than the first expiring futures contract, which in turn is cheaper than the second expiring futures contract. Put simply, a commodity gets more expensive the farther out in time you go with futures contracts. It's because of the cost of holding the commodity over time. Natural gas, which is trading with December contracts right, will flip to January contracts next week and that's when we'll see a price bump because of contango. In other words, rather than falling for the next few weeks to the solid bottom of $2.50 the price is going up.
A look at the daily chart, below, of those January natural gas futures also supports Garner's thesis that the commodity has yet to hit bottom. The chart indicates a floor of $2.75 but Garner doesn't expect that floor to hold. Look for a slide back to a range of $2.50 to $2.65.
Garner sees natural gas sliding back to a range of $2.50 to $2.65. In other words, the bounce we just saw is going to be short lived.
A look at the weekly chart, below, indicates a floor of $2.50. In other words, gas has another leg down before a sustainable upswing.
So much for factors that are pulling down the price of gas. Garner also points to a couple of countervailing forces. One is the value of the dollar; the greater the value of the dollar the more expensive natural gas (and any commodity priced in U.S. dollars) is. While the greenback has been rising (see chart below), she gauges that currency markets are getting ahead of themselves and the dollar is over-valued. The usual end-of-year downdraft in the value of the dollar should help buoy natural gas prices.
Secondly, two technical indicators, the Williams Percent R oscillator and the Relative Strength Indicator, indicate that natural gas is oversold and, thus, due for a bounce.
The upshot of all these factors, according to Garner, is that natural gas prices might need to go a bit lower before they can go higher. She thinks investors should be prepared for one more slide lower and then, maybe, natural gas will be poised for a sustained price recovery.