Jim Cramer was shocked by the collapse of natural gas prices in the past month.
"One of the largest natural gas collapses in recent memory, a crash of epic proportions that no one is talking about," the "Mad Money" host said.
To figure out where natural gas prices could be headed, he turned to technician and commodities expert Carley Garner. She is a colleague of Cramer's at RealMoney.com and the co-founder of DeCarley Trading.
While Garner predicted the decline of natural gas a month ago, she was stunned by the rapid decline. She believes that the natural gas market is showing signs of bottoming.
However, Garner warned not to get too enthusiastic, as any recovery will be complicated by contango. Contango is the idea that the spot price of a commodity will be cheaper than the first expiring futures contract, which will be cheaper than the second expiring futures contract, and so on.
Basically if a commodity is in contango, it indicates that it will be more expensive in the future.
The simple reason is because the cost of carrying the commodity means that each futures contract should be priced for each additional month.
Contango matters, Cramer said, because the December natural gas futures were slammed down to $2.50, found a floor of support and then bounced. But because of contango, the January futures contract made a low at $2.72.
Garner believes that natural gas cannot bottom until it reaches $2.50. That means the January natural gas contracts need to be hit hard before they can be bottom. This will matter when December contracts expire next week, when investors will focus on January.
Garner said the issue with contango is that just when investors think natural gas will bottom, the futures contracts will roll over. Because the price one month out is higher than the spot price, that means natural gas has to go down again.
There are also seasonal tendencies to take into consideration. Many investors believe that the price of natural gas will go higher from consumers spending more money to heat their homes in winter. Unfortunately, Garner isn't one of them.
Garner noted a seasonal pattern that showed natural gas prices tend to remain weak to neutral until the end of the year. Garner believes that natural gas prices will go lower after the December futures contracts expire.
While Garner sees a floor of support at $2.75, she doesn't expect the floor to hold. In fact, she thinks the recent bounce will be short lived, and January futures will go into the $2.50 to $2.65 range.
As for Cramer, he thinks that many investors are taking President-elect Donald Trump seriously and coal will make a comeback.
"I think coal is down, not out, but it is only going to come back in fashion with the utilities if natural gas spikes tremendously because so many of them have retired lots of coal plants," Cramer said.
Ultimately, the charts suggested to Garner that natural gas will head lower before it can rebound. She recommended investors to be prepared for a slide lower, and then there could be a sustained comeback.