Natural gas prices are screaming higher.

Earlier this month, the price of natural gas was languishing at about $2.75 per million British thermal units (MMBTU). Yesterday, it closed at $3.06 – its highest level in seven months. That’s an 11% gain in three weeks.

Natural gas bulls are pumped up. They see the action as a breakout move higher. One analyst announced on television yesterday, “Natural gas could be trading at $3.25 or even $3.45 per MMBTU by Halloween.”

I disagree. I think the natural gas bulls are wrong.

It looks to me like the next big move in natural gas prices will be lower. Take a look at this chart…

At first glance, it sure does look like the price of natural gas broke out above resistance this week. It’s not enough of a breakout, though, to consider the move “definitive.”

In other words, a slight down day today or tomorrow could reverse the breakout and turn it into a “fake-out.” Bulls need to see natural gas press higher today, and probably tomorrow too, before declaring a breakout above resistance.

Somehow, I don’t think that will happen.

Three of the four momentum indicators at the bottom of the chart are showing negative divergence. In other words, as the price of natural gas has rallied to a higher high, the indicators have established lower highs. This sort of negative divergence is often an early warning sign of an impending reversal lower.

Also, traders should keep in mind that the price of natural gas, like the price of most commodities, is highly seasonal. Looking at how natural gas performed during this time last year can help provide clues as to what to expect over the next several weeks.

Those clues are bearish.

The rally this month is nearly identical to the rally in natural gas last September. It’s worth noting that last year’s rally peaked at the end of September. The price of natural gas fell hard – by almost 10% – over the next three weeks. A similar move this time around would wipe out a good chunk of the recent rally.

So, now is probably not the best time to be buying natural gas. Prices will likely be lower by Halloween.

Best regards and good trading,

Jeff Clark

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