Trading opportunity: Natural gas breaks out of bullish chart pattern

On 20 April the price of North American natural gas made a major low at $1.90 per million BTUs (British thermal units), since then it has risen more than 50% to a price today of $2.88.

This trend reversal has caused natural gas to trace out a bullish Inverse Head & Shoulders pattern and as the chart below shows it could now be poised for a decent move up.

The Inverse Head & Shoulders pattern

The Inverse Head & Shoulders pattern typically forms after a downtrend and its completion marks a major change in trend. The pattern contains three successive troughs with the middle trough (the head) being the deepest and the two outside troughs (the shoulders) being shallower. Ideally, the two shoulders would be equal in height and width. The two highs in the middle of the pattern can be connected to form the resistance, or neckline.

A 1 year chart of natural gasA 1 year chart of natural gas

Chart courtesy of stockcharts.com

As you can see the pattern completed as it broke above the neckline on high volume. The price has since fallen to retest the neckline, which should now provide support. The price should now advance to the target price of $3.74.

Calculating the target price

The target price is found by measuring the distance from the neckline to the bottom of the head. This distance is then added to the neckline to reach a price target. Any price target should serve as a rough guide and other factors should also be considered. These factors might include previous resistance levels, Fibonacci retracements or long-term moving averages.

Those looking to play this move should go long at the current price and set a stop loss just below the neckline at around $2.70.

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