Faith Trumps Technicals in the `No Man's Land' of U.S. Gas

  • Some charts scream `buy!' yet gas prices keep falling
  • Could the heating fuel actually fall to zero, traders wonder

Forget the Fibonacci sequence, the Morning Star chart and the Relative Strength Index, mathematical patterns that help traders place bets. After this week’s fall in U.S. natural gas prices, you may need to use your gut and a little faith.

While some closely watched technical momentum indicators have been telling traders to buy gas over recent weeks, prices continue to plunge, reaching the lowest level since 1999 on Tuesday. Then there’s the Fibonacci analysis, which suggests gas could fall to zero, according to ICAP Energy LLC.

“Sometimes the market psychology is so bad they slice through some of these technical supports like butter,” Phil Flynn, senior market analyst at Price Futures Group in Chicago, said on Tuesday.

An unusually warm winter and steady supply out of shale formations are defying the logic of charts and formulas. The price collapse is confounding technical traders who depend on automation and programming to call market tops and bottoms, forcing them to crunch even more data to make predictions.

“There is some guidance back in the chart, but the question is how much do you trust it?” John Kilduff, partner at Again Capital LLC in New York, said in a telephone interview Wednesday. “The natural gas market is probably one of the most highly technical markets out there so you have to have knowledge and faith when you are in no man’s land.”

Gas has tested the $2 per million British thermal units level on the New York Mercantile Exchange, seen by many as a psychological threshold, three times since late October before plunging through a week ago. Declines accelerated this week as futures fell through a technical support level of $1.902 , the 10-year low reached in April 2012.

Futures have dropped 39 percent so far this year, to $1.767 on Friday, heading for the biggest annual loss since 2006.

Free Fall

“Right now it’s kind of in a free-fall and everybody is grasping at straws,” Flynn said. “Usually those psychological numbers are stopping points.”

The RSI momentum indicator fell to 30 on Dec. 10 and has stayed below it since, signaling gas is oversold.

“I don’t doubt natural gas is oversold,” said Stephen Schork, president of Schork Group Inc., consultants based in Villanova, Pennsylvania. “What the technicals and algorithms cannot pick up is fundamental change in the market.”

Fibonnaci analysis over the life of the Nymex gas contract shows “there is no real Fibb support above zero,” Drew Wozniak, vice president of market research at ICAP, a brokerage in Jersey City, New Jersey, said in an e-mail Tuesday. Prices fell to a record low of $1.02 in 1992.

Market Gap

“We are getting to the point where it’s possible for it to trade to zero,” said Kilduff, though he sees hard support at $1. “Given how steep the recent price action has been, you have to get brave here and try to play for the bottom.”

Technically, the trend over the past several years is for prices to set lower lows and lower highs. That signals “more pain ahead,” Craig Johnson, senior technical strategist at Piper Jaffray Cos., said Wednesday.

“I would not call a bottom on this at all,” he said.

Prices may jump based on what technical traders call a gap in the market. Gas plunged 8 cents in the two days between the Friday, Dec. 11 close and the start of regular trading. The market tends to double back and fill such gaps, Kilduff said.

“Don’t fight market sentiment,” Wozniak said. ”The road to picking the right bottom is littered with the bodies of many traders.”

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