Thursday, April 21, 2011

Point and Figure of Natural Gas

Most people are familiar with a standard bar chart or line chart showing price versus time, but there are many different charting techniques that are used in Technical Analysis. Additional price and time charting techniques include Candlestick charting and EquiVolume charting but there is also a technique that ignores time. The technique is called Point and Figure, and it started hundreds of years ago as a way to easily record price movements. Without getting into the minute details, a chart is constructed by marking an X when prices rise and an O when prices fall, and when there is a change in the price direction a new column is started. We have never written on Point and Figure but I thought it would be interesting to show how the charts can be used as a guideline for price projections.

Natural Gas has been in a monster bear market since 2007, mired by oversupply as the new fracking technology has opened massive fields. However, using the charting technique of Point and Figure, it is possible that Natural Gas (using the ETF UNG) put in a temporary bottom earlier this year. The chart below is a UNG Point and Figure chart from 12/31/10 to 4/21/11 ($0.10 x 3 for those familiar with P&F). The high price for UNG this year was $12.90, marked by the highest X, but then the price had a big sell off and fell down to $10.10, marked by the lowest 0. Moving right on the chart from the low, price found support at $10.20 since the O’s could not move lower and bulls took control as the column of X’s moved successively higher.

We can also use this chart to approximate an upside price target if the bulls stay in control. The columns marked off by the purple line are called a congestion zone and using this congestion zone we can project price upwards after the long column of X’s broke above $11. The price objective for this congestion zone is (8 columns x $0.10 box size x 3 reversal) + $10.10 (the lowest price in the congestion zone). That is a price objective of $12.50 for UNG or a gain of 9% from current levels. For an asset that’s as unloved as Natural Gas, that’s not a bad gain for a trader and this may be the beginning of something bigger.