In the last several days there was a lot of chatter in the markets that natural gas had established a “Doji” shape and was due for a rebound.
For those unfamiliar with the term, the Doji is one of many patterns used in Japanese candlestick analysis. It occurs when prices trade within a normal range and settle very close to where they opened. In a sideways market, the signal means very little, but in a trending market it suggests that buyers and sellers have found a fair price, and the down/uptrend is due to end or be reversed.
For example, consider Nymex WTI prices in early July 2010: Prices were in a downtrend from 78.00 on June 28th. On July 6th, as highlighted by analyst Hamza Khan in today’s issue of The Schork Report, a classic Doji shape was formed as prices opened at 72.06 and closed just eight cents lower at 71.98. A rebound began the next day and by July 14th, prices were printing above 78.00. The Doji correctly timed the reversal.
Now, let us consider what happened on July 23rd in natural gas, when prices were in a downtrend. Prices opened at 4.066 and settled at exactly 4.066, a perfect Doji!
Did the downtrend reverse? Of course not: prices settled last night at 3.871.
This should highlight not just the nuances of technical trading, but also the fundamental difference between commodities. WTI has become a speculators market, where Wall Street is king.
Natural gas, on the other hand, is far more esoteric, with cash traders looking to fulfill orders with little regard to technical signals. Thus natural gas has earned its moniker — the widow maker.
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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.