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Apart from whether or not President Obama actually lays out a natural gas program in today's speech, my technical work on iPath DJ-UBS Natural Gas TR Sub-Idx ETN (GAZ) is "warning" me to expect higher prices regardless.
Let's notice that the March upleg from 6.85 to 9.05 has returned to its 50% support plateau (this morning), where it pivoted to the upside into a potent rally to 8.35 so far. Right now, my near-term work in natural gas futures, the U.S. Natural Gas ETF (UNG), and GAZ indicates that a new upleg likely started at this morning's lows.
A climb that sustains above 8.40 will be the first confirmation that a new upleg is in progress.
As most readers of my blog have seen with my posts in the blog and in the live chat, I have been looking for a push into the $132-$133 area as the first leg of the "B" Pattern in an ABC Zigzag correction off of the Feb 2011 highs.
For those of you unfamiliar with eSignal, the rainbow colored bar is the "MOB" target drawn by their charting software. MOB stands for Make-or-Break, and it is drawn off of pivot points using Elliott Wave Theory.
March 24th Forecast:
The first leg down from the Feb top ("A" of the ABC Zigzag) was in itself a zigzag and therefore I am expecting a flat pattern for the B leg pattern. For those readers that are less familiar with this, here is what I am expecting (along with the forecast I drew on March 24th) …
There was a powerful uptrend in the stock market from September 2010 to February 2011, interrupted by one correction in November. I have anecdotally observed that 1344 exceeded the price target that many were expecting before another correction would ensue.
Throughout much of this trend, as early as December when the S&P 500 was in the low 1200s, high levels of bullishness, measured by investor polls and option put/call ratios, were often quoted as a reason to expect a 5% or greater correction. I was also guilty of these forecasts, embarrassingly early.
What have I learned? For anticipating market turning points, extreme bullish or bearishness is only part of the sentiment picture. This sentiment sets the conditions for what I am hypothesizing is a better sentiment-based timing tool—that is, capitulation. Synonymous with surrender, this is the preferred term in finance for two similar behaviors. First, capitulation is when investors who have held on to positions during a bear market with the tenet that “prices always go back up,” finally cannot endure the pain of seeing the value of their accounts drop, and decide to sell. This is an event that defines a primary trend. Smaller trends and turning points can be affected by the second type of capitulation, in which the callers of a bottom in a bear market give up and turn bearish, or the callers of a top in a bull market give up and turn bullish.
It is not extreme sentiment that will cause the market to turn, but rather, capitulation. One would expect capitulation to occur in an environment of extreme sentiment. As long as there is a significant enough group of individuals calling for a top, there may be 1) short sellers and 2) buyers on the sideline, not wanting to enter at a top. A top occurs once there are no buyers left—investors on the sidelines can still buy and shorts must buy to cover positions. These two groups must be converted before the actual top is printed.
A great and sad irony results from these phenomena. If capitulation is a necessary condition for a top or a bottom, then the market will not turn until it occurs. Think about that. As long as a group of individuals hold on to their belief that the markets will turn, the markets won’t turn. The majority’s conviction must be broken because this conversion, ipso facto, caps off the trend.
Sometimes, capitulation is identifiable by major spikes in volume coupled with parabolic moves in what are called blow-off tops and panic bottoms. There are no polls set to capture this type of surrender, per se. What one must identify is the conversion of bulls to bear or of bears to bulls, not the absolute level of each. To do so, one must scout for viable anecdotal evidence. Perhaps technical tools can be devised to measure this conversion.
In summary, in an environment of extreme sentiment, one must look and wait for capitulation in order to better time a turning point. For this to happen, I hypothesize that the majority of countertrend forecasters or traders, by necessity, have to convert. Until they do so, an established trend will continue.
(To read other market-themed essays, please visit my site .)
It's just one stock, but it's an awfully important one – Apple, Inc. I know how ga-ga bullish everyone has become these days, including, it seems, almost all Slopers, but I want to quietly point out that the broken trendline in AAPL is at least worth a glance.