October natural gas futures bucked the trend of most commodity markets last week by posting a strong 2.75% gain to finish at 4.071.
Technically the market posted a weekly closing price reversal bottom. A follow-through rally through 4.159 will be needed to confirm the bottom at 3.876. Based on the short-term range of 4.600 to 3.876, the first upside target is a retracement zone at 4.238 to 4.323. Downtrending Gann angles at 4.2100 and 4.2800 could also prove to be strong resistance.
The main trend is down on the weekly chart. A trade through 4.600 will turn the main trend back up, however without a support base; this rally is likely to fizzle. Despite the rally, it doesn’t look as if it was fueled by strong buying, but rather short-covering.
Supply and demand played a role in last week’s rally. A smaller-than-expected increase in weekly natural gas storage added a boost. This ended weeks of larger-than-expected increases which were largely responsible for the selling pressure that took the market to its lowest level for the year.
Besides technically oversold conditions, the only key driving force left to consider is the weather. The absence of the heat that lingered over the Midwest and the East in July has dissipated, taking away one of the possible forces that could drive price higher. The National Hurricane Center is currently tracking four storms in the Atlantic Ocean that could develop into hurricanes. At this time, prices seem unaffected as they are not even close to natural gas production facilities in the Gulf of Mexico.
Short-covering due to oversold conditions may provide some support this week; however, gains are likely to be limited as production continues to remain at a high level.
Factors Affecting Natural Gas This Week:
• Supply and Demand. Expectations are that production will remain high, leading to increased supply and lower prices. Traders should always watch for a possible surprise such as a lower-than-expected increase. This would likely trigger a short-covering rally.
• Weather. Although excessive heat seems to be out of the equation, traders should continue to monitor tropical storms in the Atlantic to see if they have any chance of reaching production areas in the Gulf of Mexico. Although only about 7% of U.S. production takes place in this region, short traders tend to overreact to the upside when they hear hurricane news.
By. FX Empire
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