Rollicking natural gas prices and technical analysis: a primer on Dow theory, the Elliott wave, and economic winters

The recent crash in oil prices has been generating attention around world—and for obvious reasons.

This morning, retail gasoline prices are hovering around 83 cents per litre in Metro Vancouver, less than half than their peak in April 2019.

This is linked global glut in supplies triggered by people staying at home during the COVID-19 pandemic.

What's received less attention has been the ricocheting price of natural gas.

That has significant consequences for the British Columbia government, which is anticipating $207 million in natural-gas revenues in this fiscal year.

Natural-gas prices rose sharply at the start of the week of April 20 before plummeting in the final three days of trading.

There was a further decline on Monday (April 27) before a late-day rally offset most of the day's losses.

As of this morning, natural gas is selling at the historically low price of US$1.85 per million British thermal units at the Henry Hub exchange in Louisiana.

Fundamental versus technical analysis

There are a multitude of explanations for what's happening.

Some of them relate to the impact of COVID-19 on the economy.

Commentators who look at macroeconomic factors such as supply and demand, interest rates, currency markets, unemployment, and yes, pandemics, are employing what's known as "fundamental analysis".

Fundamental analysts might also take into account the political environment, global trade patterns, a company's management and financial performance, and other issues when determining whether a stock or a commodity may go up or down.

But that's not the only approach.

Others rely more heavily on "technical analysis".

These commentators examine historical charts, like the one above for natural gas.

They look for signs that a stock or commodity price might be on the verge of an upswing or downswing.

Writing on FXEmpire.com about recent gyrations in the price of natural gas, former Citigroup Commodity Group global trading manager David Becker delivered a classically technical observation.

He wrote that the "10-day moving average is poised to cross above the 50-day moving average, which means that a short-term uptrend is now in place".

That may seem like gobbledygook to novice investors, but it makes perfect sense to the technical analysts.

Another veteran, KKM Financial managing director Dan Deming, said on April 24 that traders have "seen resistance" this year on three occasions at US$2.10 per million BTUs of natural gas.

Like Becker, Deming was aware of the longer-term trends.

In that instance, he applied technical analysis in drawing conclusions about where the price of natural gas might go.

Dow theory led the way

Technical analysis has a storied history in the investment world.

The founder of the Wall Street Journal, Charles Dow, laid the foundation through 255 editorials in the paper. After his death in 1902, those articles gave rise to Dow theory.

It postulates that market trends have three phases and that the stock market discounts all news because it adjusts so quickly to new information.

Dow theory also promotes the notion that price trends are confirmed by high trading volumes. And it focuses a great deal attention to market trends, with its proponents looking for clear signs of reversals.

Dow theory is not the only form of technical analysis.

Another approach is the Elliott Wave theory, which was popularized by writer and analyst Robert Prechter during the bull market of the 1980s.

A Yale University psychology grad and former drummer in a rock band, Prechter was most concerned with mindset of the masses, becoming an influential market guru.

Prechter leaned heavily on early 20th-century U.S. analyst Ralph Nelson Elliott, who looked at long-term charts and wrote four books, including The Wave Principle in 1938 and Nature's Law—The Secret of the Universe in 1946.

Long-wave theory was also promoted by Soviet economist Nikolai Kondratiev in his 1925 book The Major Economic Cycles.

He maintained that capitalist systems have a long-term boom-and-bust cycle lasting about 60 years.

These six-decade periods are marked by economic patterns that reflect the seasons: spring, summer, fall, and winter.

Former Bolder Investment Partners vice president and author Ian Gordon was perhaps the best-known Vancouver adherent to this long-wave approach to economic analysis. But he wasn't the only one.

Just months before a global economic meltdown in the fall of 2008, Gordon told the Straight that he was seeing a "mirror image" of what happened in the U.S. stock-market crash of 1929. He linked both financial crises to debt bubbles that became embedded in the economy.

More than a year ago, Bloomberg reported that Canadian household debt was the highest per capita among the Group of Seven economies. By the end of 2019, Canadians owed more than $2.3 trillion, according to Statistics Canada.

With sky-high consumer debt, it's surprising how little commentary there's been about this aspect of the current economic crisis.

There was a relatively quick recovery from the global economic implosion of 2008.

In light of that, it's far too early to say whether the recession—or depression—of 2020 will evolve into one of those horribly long economic winters predicted so many years ago by Kondratiev.