Poor Result of Effort: A Sign Of Supply, Nat GasNatural Gas:
The essence of techncial analysis (at least in my opinion) is ascertaining the ebb and flow of supply and demand.
Natural Gas futures offers a great example of a market which, despite ultra-bullish headlines, displayed clear signs of strengthening supply/falling demand prior to breaking hard. The reduction of thrust or the declining net result of effort displayed in this chart as an important warning of impending change and is a pattern I always pay attention to.
In this example:
· Each successive thrust covers less new ground than the prior thrust: 76 points, 42 points, and finally 14 points. There is a clear reduction in the net result of the effort expended. This often appears as an arching over.
· Each successive thrust is often at a reduced angle: 43, 30 and finally 20 degrees.
· Each successive thrust often takes less time to accomplish. 14, 14, and finally 9 bars. But time is the least important of three measures.
Since each thrust has less momentum. It’s not surprising that this would register as an ongoing divergence on a momentum oscillator like RSI.
This particular pattern built over almost 2 months of trading (37 daily bars), allowing plenty of time to build a trading plan, either exiting if long or perhaps building a plan to build a short position around the decline.
More reason to take the development of the pattern more seriously is found in the weekly chart (see the triple screen post linked below). In the example there are three successively steeper trend lines that roughly define the markets trend state.
· I tend to be particularly attentive to these patterns after a third steeply pitched uptrend develops in the charts of higher degree.
· The parabolic acceleration in the third leg often offers warning that the trend is moving into its late stages.
· But, parabolic moves often last for extended periods and cover lots of ground.
· I like to look for this pattern on standard scale as opposed to log scale charts. Log scale tends to hide the parabolic nature of the third leg. While others will argue over the efficacy of standard scale charts over long time periods and large moves, I clearly prefer non log scaling for this pattern.
There was also an intermediate perspective warning in the RSI momentum divergence.
Both patterns of are fractal, occurring across all markets and all time frames. The reduction of thrust pattern tends to display at tops rather than bottoms. Often, they show up well in the hourly charts.
Note: I inadvertently used the MCX instead of the NYMEX futures. But there are no material differences in the patterns between the two
Good Trading:
Stewart Taylor, CMT
Chartered Market Technician
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