Natural Gas: Stepping GAP Patterns May Suggest Upside Breakout Pending

Oct 16, 2020 12:12PM | Commodities

An upward stepping GAP pattern for UNG and has our research team believing a strong upside price breakout may be pending. We believe the open gap patterns, which are below the current price levels, represent a building momentum based/bottom that has setup in UNG. This pattern, if we are correct, may prompt a big breakout move in the near future.Three GAPs Pattern And Momentum Base Complete, What Next?These GAP patterns are similar to a Japanese Candlestick pattern called “Three Gaps”. A Three Gaps pattern is typically associated with trending and suggests an exhaustion top may be near. It is represented by three very clear open price gaps in a defined trend (up or down), as can be seen in the chart below.
Three Gaps Example
As you can see, a clearly defined trend has extended higher while three clear price gaps have taken place. The first is considered the Breakaway Gap. The second is considered the Runaway Gap, and the last is considered the Exhaustion Gap.
It is fairly easy to understand how these Gaps translate into trends. The first price gap usually represents a strong trend has initiated where price breaks away from previous price ranges. The second gap takes place within the trend and represents trend momentum forcing a price gap to take place. The last gap represents momentum reaching extreme levels, prompting another gap, yet getting closer to an exhaustion top or peak.
Take a look at the UNG Daily chart below. A very clear series of Three Gaps has completed before the start of September 2020. Then, an Exhaustion Peak rolled price levels lower—reaching just above the $11.00 level. This created a new Momentum Base setup above the Runaway Gap level. Our researchers believe that because the Breakaway and Runaway Gap levels are still “open”, a potentially new upward price trend may setup prompting another set of Three Gaps as price accelerates above the $13 to $14 price level.

The Exhaustion Gap above was filled by the downward price rotation recently. This suggests the momentum from the Breakaway and Runaway Gaps is still valid, and a new upside price trend may prompt a big rally in Natural Gas and UNG over the next 30+ days.
The Natural Gas Futures Daily chart below shows a very clear price gap that took place on the contract rollover date. This suggests the new month’s price levels represent a perceived higher valuation than the expired month’s contract. Our researchers believe this provides further indication that a bullish rally phase may be pending in Natural Gas.
What becomes more important than the Gap at this time is that the current price levels have allowed the gap to stay OPEN. Thus, the bullish momentum is strong enough at this time to prevent the rollover gap from being CLOSED.
Natural Gas Futures Chart
We believe any upside price rally above $2.95 to $3.00 may prompt a breakout rally, possibly creating or prompting a new Runaway Gap pattern, as the price of Natural Gas extends to new Yearly highs. If this rally is similar to the 2018 rally in Natural Gas, price levels above $4.00 to $4.25 are not out of the question.
Skilled technical traders should prepare for one of two options going forward; a breakout above the $3.00 price level in Natural Gas—prompting a new breakout bullish price trend, or a continued downside price rotation where the open gap is retested, which would create a new momentum base near $2.40. This is a chart that technical traders must have on their watch lists right now. The opportunity for a big breakout trend is likely just a few days or weeks away.

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