The Lesson of Change!

The Lesson of Change!

This Sunday I couldn't find clear trading setups that might develop in the next week, so I'll rather focus on a situation that presents a potential lesson to all of us. A lesson about the ever-changing markets.

It is about what is happening in Natural Gas. An instrument not very popular among traders.

Take a look at the next chart:

Natural Gas Futures analysis

It is no secret, that the Natural Gas is in a downtrend for some time. After the last push down, a bottom (point A) was made. Then a pullback up to point B and another bottom, point C. 

So far nothing out of the ordinary, but here's what happens next. 

A technique I've learned from Larry Williams is saying that the next top or bottom can be timed based on the time needed for the chart to form the last two bottoms or tops. To time a bottom you need the distance (number of days) between the two most recent tops. That time distance is then applied to the last bottom. To find a top the distance between the last two bottoms is added to the last top.

In our case, the top (point D) is expected to be formed after the same number of days needed to create the last two bottoms A and C, counting from the previous top, point B. The time distance between A and C is 14 days. It is in trading days, so we are counting the bars on the chart.

Let's continue.

From point C the market moves up, breaks the previous top (point B) and surprisingly creates a new top, point D which is exactly 14 bars from point B. More to it, with this new higher top the price changes the movement's structure to a bullish one.

That bullishness is confirmed by a point E which is a higher bottom than C. The distance between C and E is a little more than the one between B and D - 18 days. Using that distance between the last two bottoms we could have estimated that the next top should come 18 days after point D. 

From E the prices moved up and, with volume, broke higher (the highlighted bar). The top, point F, came a few days later, exactly 18 days after point D! 

So far, all is bullish. But that is about to change.

Till that large volume day, between E and F, all were pointing toward a continuation of the bullish move. But signs of distribution started to appear from the next day. Every time the Natural Gas was trying to cross above 2.985 a distribution began.  

That can be deduced by the increased volume in all those bars touching the zone and by their shapes LN and LT, indicating distribution. Same is the message from the diverging On Balance Volume (green line on the chart).

Apparently, something has changed, but is it enough? Usually, traders think in opposites. If it is not bullish it is bearish and vice versa. But this is not always the case. Most likely, the fundamental reason behind the recent up moves and breakouts is being reconsidered by the market participants at the moment. 

So Natural Gas is in some mid-ground, that could lead to both up and down moves. The situation can be used in the short-term since the targets for both directions (see the chart) are equidistant.

Currently, the price is in a range above the breakout line (blue dotted line). That is still helping the bullish scenario. If we count another 18 days we should expect a bottom around Tuesday, Wednesday this week. To find a direction the market needs a new push right now.

It can come from a breakout of Friday's range. Its low created the latest lower short-term high and if Friday's high is penetrated the new important short-term point would be the new higher short-term low.

I'll say again that Natural Gas is not an easy market to trade and I am not planning to trade it unless a really good complex signal presents itself. But the message here is different. It is about showing you how a change happens in the market. Not like a coin with only two sides but rather a process that is being reconsidered many times.

Now, let's find your missing piece!

Vassil Banov,
Founder of Piece of Trading

Trades mentioned here are either taken or will be taken by the author if the right conditions appear. They are NOT recommendations nor any of this constitute investment advice. Please read the Risk Disclaimer
Seasonal indicators courtesy of Larry Williams, Charts made with TradeStation®.

TAGS: Natural Gas, Fundament, Price Action Trading, Larry Williams

Find this content helpful? Support our efforts by buying us a coffee!