The price of natural gas fell to as low as $2.704 on July 19th, before recovering to $2.996 on August 21st, only to decline again to $2.759 on September 10th. As of this writing, natural gas trades at $2.850, but in order to find out what to expect from now on, we have to take a look at the recent price behavior through the prism of the Elliott Wave Principle and see if a pattern would emerge. The 1-hour chart below can help us with the task.
The chart reveals that the structure of the rally between $2.704 and $2.996 has taken the shape of a perfect five-wave impulse, labeled 1-2-3-4-5, where the sub-waves of wave 3 can also be easily identified. Wave 5, on the other hand, is a reversal pattern, known as a wedge or an ending diagonal in the Elliott wave dictionary.
A three-wave correction in the opposite direction comes after every impulse, so the following selloff to $2.759 resembles a simple A-B-C zigzag retracement, which completes the 5-3 wave cycle. According to the theory, the trend should now be expected to resume in the direction of the five-wave sequence and eventually exceed its highest point.
This pattern gives the bulls hope they can reach the $3.000 mark from now on and even shoot for $3.1000, as long as the price of natural gas stays above the bottom of wave C at $2.759. This bullish setup provides a decent risk/reward ratio of at least 1.8.
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