Natural Gas Analysis for the Week of October 17, 2011

Technical traders could not have asked for more from December Natural Gas futures last week. Not only did the contract post a daily closing price reversal bottom on October 13, but it followed up with a weekly closing price reversal on Friday, setting the stage for a possible start of a huge recovery rally.

Although the main trend is down, the weekly closing price reversal bottom signal is often the start the bottoming process. A follow-through rally through last week’s high at 3.984 could be enough to trigger an acceleration to the upside. It’s not clear whether buyers are participating in this bottoming action, however, with the market overloaded with short-traders, it doesn’t appear it is going to take much to drive many of these traders out of their positions.

Another sign of developing bullish sentiment is the close over a pair of steep downtrending Gann angles at 3.763 and 3.831 this week. These angles from the 5.283 and 4.871 tops have held the market down for 19 and 13 weeks respectively. The close over these angles sets up the potential for another round of short-covering this week.

A typical weekly closing price reversal bottom triggers a 2 to 3 week rally that often reaches at least 50% of the previous break. Based on the 4.871 to 3.747 range, bullish traders can anticipate a potential retracement to 4.309 to 4.442 over the near-term.

The fundamentals may have to take a backseat to the technicals this week since there isn’t much bullish news to support a lengthy rally. Inventories continued to grow more than expected last week, so the conclusion is seasonal pressure or simply extremely oversold conditions triggered the rapid turnaround in the Natty Gas market last week.
While we are speculating about the reason for the bottoming action, we should throw in the possibility of an early winter. It’s funny how talk of an early winter seems to always come up when prices are cheap. Nonetheless, the rumors swirling about cool weather hitting strategic areas may have been enough for some short-traders to pare their excessively short positions.

With prices low and inventory high, it is going to take extremely cold conditions for long periods of time to burn through enough natural gas to trigger a panic. Based on this conclusion, bullish traders should just accept a quick rally into the retracement zone and walk away from the long side until the technical and fundamental conditions come to an agreement.

Factors Affecting Natural Gas This Week:

Short Covering: Short traders have driven natural gas down for over three months. Low prices and oversold conditions coupled with rumors of an early winter may have just been the right combination of events to scare some of the weaker short out of their positions. If supply and demand is their main guidance, then don’t be surprised if these traders refresh if prices are higher after a 2 or 3 weeks.

Supply and Demand: Natural Gas inventories are still bearish despite last week’s rally. Exploring rigs are still at a high level without any signs of letting up. Until this number drops below 800, it should continue to be a bearish factor. Last week’s rig count stood at 936. Simply stated, injections into supply have to stop and/or demand has to increase to sustain a long-term rally. Until this, rallies are likely to be sold.

Weather: The forecast for below normal temperatures over the next 6 to 10 days may be enough to encourage more short-covering, but what this market needs is an early long, lingering cold snap in the Midwest or on the East Coast to put a little fear in the bearish traders.

By. FX Empire

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