Technicals | Jun 29 2010
By Rudi Filapek-Vandyck
Head-and-shoulders formations are increasingly appearing on price charts this month. At least, that's the impression one gets from reading through various market updates these past weeks.
Many equity indices appear to be carving out what would at best turn out an unbalanced head-and-shoulders formation, if the current downturn continues into July. But it's exactly the unbalanced nature of the formation that has some chartists scoffing at the suggestion.
However, few would dispute the head-and-shoulders formation that has now appeared on price charts for natural gas, especially since the “head” also represents a firm rejection at the 200 day moving average.
Not good, and natural gas should once again be looking at lower price levels.
Technical market analysts at Barclays Capital are anticipating a return to the lows seen in April, in May and in June. If correct, this would make for a rather repetitive monthly pattern. It raises the obvious question: How many times can price action retest previous lows without breaking supposed technical support?
Aluminium too is displaying a head-and-shoulders pattern, but in reverse. This would suggest price action bias is to the upside. However, the above mentioned chartists at Barclays warn investors should not get too excited about it.
The reason is because aluminium is still trading firmly below the 200 day moving average. Aluminium broke below this trendline in May and already tried but failed to rise above it once. Barclays is of the view that a second attempt (which would be in the making right now) is poised to equally fail.
Overall volumes are thin and the chartists see this as another signal the current move upwards is nothing but a counter-trend move. As such, the 200-day average, presently at US$2103/t, should cap any upside.
Barclays Capital chartists look for a resumption of the larger bear trend once the current move upwards runs out of steam. The team is targeting a move towards US$1776/43 “congestion and retracement support” area.
The chartists note a month-end close below US$1967/t would complete a quarterly Bearish Engulfing Candle, which would further increase the odds of continued weakness into the beginning of Q3.
