Natural Gas: The Beginning of a New Era?

This year’s winter weather has been one for the record books! And as you’re likely aware, it’s sent energy prices soaring.

Check out the price hikes we’ve seen since early November…

+8% in crude-oil futures

+12% in wholesale gasoline futures

+19% in heating oil futures

And get this… natural-gas futures are up a whopping 79% after peaking at a 119% gain a week ago.

I certainly would NOT recommend buying natural-gas futures today. Prices should fall back to earth once spring weather nears.

Still, the weather-prompted surge has the potential to usher in a new era for natural-gas prices. Here are three charts that show natural-gas prices may be on the verge of ending a 10-year bear market.

First, here’s a chart on natural-gas futures prices going back to 2003. Each bar represents a month’s worth of trading.

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Nat-gas futures first hit oversold levels in early 2012. Until the recent surge higher, prices moved sideways, forming a support level at $2.50. Meanwhile, the Relative Strength Index (RSI) showed positive (bullish) divergence, suggesting prices would soon break higher.

January’s close, at $4.11, marked a significant bullish breakout of the $3.85 high that was made in April 2013, as that winter season came to a close.

Natural gas will likely close February near the $4.50 range, adding to January’s gain. The real test will come once winter weather fades. We should expect prices to fall back, re-testing the $4 level at a minimum. A re-test of the $3.85 is also possible.

For natural gas to make a secular turn from bear market to bull market, it must first prove able to stay above $4. Watch for the test to unfold from April onward.

Here are two other charts showing bullish breakout of natural-gas prices.

This one compares the ratio of natural-gas futures to 10-year Treasury bond futures, which acts as a good gauge of inflationary pressures.

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As you can see, a significant downtrend line was broken in late 2012. After moving sideways through 2013, the ratio made a convincing bullish breakout early this year.

And here’s the ratio of natural-gas futures to crude-oil futures.

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Much the same, this ratio broke its downtrend line in late 2012, re-tested prior lows, then mounted a bullish breakout last month.

As I said above, now is NOT the time to buy natural gas. Instead, we should wait for springtime and a re-test of the breakout levels I’ve highlighted. Doing so will give us a better entry point.

Besides, it’s unlikely I’ll ever recommend investing in natural gas directly, as prices have proven to be extremely volatile. I prefer to play energy trends by investing in specific stocks.

In fact, I recommended a specific energy stock to Cycle 9 Alert subscribers last October, as winter was approaching. Our investment is now showing an open gain of 183%, beating the 119% in natural-gas prices over the same time. Click here to learn more.

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Categories: Commodities

About Author

Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.