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How to Enter Natural Gas With Resistance So Close


The loss potential for a short position is identifiable and relatively small.

Summary of Yesterday's Notable Technical Developments

Bonds sold off again Tuesday sending the yield on the benchmark 10-year note up to 3.763% intraday -- just below our initial target of 3.779%.

Stocks rallied once again as investors sought out risk assets.

The NASDAQ closed right at its critical monthly resistance level and the S&P and Dow worked their way higher to the top of their recent trading ranges.

finished slightly higher for the day after initially trading lower -- and very near initial support for the PowerShares DB Commodity Index Tracking (DBC) at the 80-day moving average.

The US Dollar Index closed higher again on Tuesday -- but off the highs of the session, which touched horizontal line resistance at 78.44 (the June 2, 2009 close).

Overnight and morning: Asian markets were uniformly higher overnight, up 0.5% to 1.25%; European markets were also higher, but the gains were much smaller, ranging from 0.25% to 0.5%. The US Dollar Index is lower and has moved below 78 as of this writing. Oil is up more than 2% and trading above resistance following this morning's inventory data release. Gold is higher by about 0.5%, but still below $1100.

Market Internals:

(Figures are rounded)

Critical Market Components

S&P 500: The S&P attempted and failed to break out Tuesday; it remains in the midst of a "rectangle" consolidation formation with 1119.01 and 1084.90 as its resistance and support, respectively; on a breakout to the downside, the next support is the ascending 75-day moving average (currently at 1078.12); any breakout to the upside will make the next meaningful resistance 1139 -- representing a convergence of Fibonacci levels.

NASDAQ: As I mentioned Tuesday afternoon on Buzz & Banter, the "line in the sand" resistance for the NASDAQ is the monthly closing level of 2252.65. Support below that level is the recent breakout point at 2212.49. The NASDAQ and semis continue to impose their will on the indices almost on a daily basis; still no confirmation from volume or market internals, though.

Dow Jones Industrials: Still range-bound on the Dow; support at rising trend line at 10,250 -- with support just below that at the 50-day moving average (currently at 10,206); resistance at 10,507.59 on a weekly close remains unchanged.

10-Year US Treasury Yield: rates continued higher Tuesday; support has been raised to horizontal line at 3.603% (December 15 close); resistance is now the 3.78% to 3.88% range -- the target for wave iii of 5.

Commodity ETF (DBC): minor support at the 80-day moving average at 23.35 with major support close below that at the horizontal line at 22.85; substantial resistance at 25; the weight on the sector continues to be gold.

US Dollar Index (DXY): new short-term support at previous resistance of 77.47; expect the DXY to continue to consolidate around this 78 level in the near-term as recent gains are digested -- consider it "the pause that refreshes" before the index marches higher toward our intermediate-term target of 81 to 83.

Semiconductor Index (SOX): no change to support and resistance for the SOX Tuesday; the new target on the upside is now at 366.52 (Fibonacci projection) with a max upside of 384.28 (bottom of first wave lower from July 21, 2006); horizontal line support exists at 332.11.

Bank Index (BKX): no change to the technical condition of the banks; critical support exists at 41.62; staunch resistance at 44.82.

Gold: gold still appears to be headed down to the 1045 support level (a 50% retracement of the wave 3 higher, which corresponds with the uptrend line); resistance is the peak of the recent short-term rally attempt at 1120.80.

Chart of the Day: Natural Gas Futures (@NG)

Click to enlarge

  • It's hard to believe it has been more than two weeks since I last highlighted natural gas. At that time, I recommended buying on a breakout above $5.30. The commodity has since approached $6 and now resides more than 6% above the breakout level.

  • The problem now is that natural gas is wrestling with important resistance at a downtrend line in place since May.

  • My best guess is that if natural gas futures are going to break the downtrend and continue higher, it will only happen after a pullback to short-term support to "re-fuel" and gather some more strength. Given that scenario, I'd advise those who want to buy natural gas to only consider entering long positions in natural gas futures or related holdings on a pullback to the previous breakout level of $5.30 on the futures.

  • One big problem I see for natural gas is the "bearish reversal" pattern that may be developing. That is where the RSI is making higher highs even as the price of the underlying security/contract is making lower highs. The resolution of a "bearish reversal" pattern typically results in new lows in price that correspond approximately in magnitude to the lower peak that was made in the pattern setup. In this case, a new low price print of $4.14 would be the resolution of the "bearish reversal" pattern.

Strategy: Given that resistance for natural gas is so close and the loss potential for a short position is identifiable and relatively small, I'd rather enter short sales against natural gas and related holdings here with tight stops in place on any close above the downtrend line resistance.

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No positions in stocks mentioned.

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