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Natural Gas: Putting Near-Term Volatility in its Place
Real-life lesson on how Elliott wave guidelines kept EWI's Energy Specialty Service on the right side of natural gas's recent slide
By Nico Isaac
Fri, 03 Aug 2012 16:15:00 ET
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Trying to navigate the combustible twists and turns in natural gas futures can feel a lot like walking through a mine field with clown shoes on. According to Reuters' data, between the years 2000 and 2010, natural gas prices fluctuated by more than 5 percent once every 7 days -- making it the most volatile commodity in the world.

It doesn't help that most mainstream methods of analyzing liquid financial markets -- such as "fundamental" analysis or "classic" technical indicators -- only give traders a very narrow, key-hole look into price action. At best, these methods may identify what the current trend is. That's great, but you can do better.
 
The Elliott Wave Principle goes above and beyond by illuminating these crucial trademarks:
 
  • How far, in term of price points, the current trend should go
  • At what price target the move may end
  • If the market doesn't cooperate with your analysis, what is the price point where you know it's time to reassess?
Let's focus on that last -- but certainly not least -- benefit of Elliott analysis: Knowing the exact price level that would negate one's Elliott wave count in time to reassess and reposition for the appropriate opportunity.
 
Here, we turn to EWI Energy Specialty Service's intraday analysis of natural gas posted at 1:44 pm on August 1. We were overall bullish, calling for a brief 2nd wave decline before retaking the upside. Chart and analysis reprinted here:
 
"At this moment, it is reasonable to conclude that wave ii down from 3.254 is still in force, now unfolding... and this wave ii fall will end as originally desired... nearer to 3.085." 
 
 
 
The linchpin of this interpretation was the red line labeled "key," which stands for key price support level. A cardinal rule of Elliott wave analysis states that wave 2 can NEVER retrace more than 100% of wave 1. If it fell below 298, wave ii would violate said rule, negate the bullish wave count, and signal the onset of a bearish decline.
 
Energy Specialty Service's intraday analysis of natural gas at 10:53 AM on August 2 revealed that prices had, indeed, tripped that support level, necessitated a new labeling as such:
 
"The drop below 2980 negates my count. As it stands... I'm looking for the market to trend down in an impulsive manner."
 
From there, the downtrend in natural gas gathered steam for a powerful 7.9% single-day decline.
 
Now, Energy Specialty Service continues to use its Elliott wave arsenal of clearly-defined rules and guidelines to side-step carefully around the traps that line the natural gas market, striving for making it safely to the other side of each major turn.
 

How Can You Tap into Energy Market Volatility?
 
 
Let EWI's most specialized forecasting service for global energy markets alert you to opportunities happening right now in crude oil, natural gas and other major energy markets. Subscribe today and get instant access to comprehensive intraday and daily forecasts that can help you make smarter trading decisions.
 
 
 
 
 
 
 

Tags: crude oil, Elliott wave, fundamental analysis, natural gas, volatility
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