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Natural Gas Analysis for the Week of March 19, 2012

May Natural Gas futures finished the week higher and in the process formed a weekly closing price reversal bottom. A trade though 2.468 will confirm the bottom and set up a possible 50 percent retracement of the break from 3.015 to 2.306 over the next 2 to 3 weeks.

A closing price reversal bottom doesn’t mean the trend has changed to up. It only indicates that the buying may be greater than the selling at current price levels. Besides the retracement target at 2.661, a downtrending Gann angle at 2.604 should provide additional resistance.

 Natural Gas analysis

Selling should resume after the market reaches its 50 percent price target or the Gann angle since the main trend is down on the weekly chart. The main trend will not turn up unless the swing top at 3.015 is violated.

Natural gas prices continued to fall last week as warm weather combined with increased production continues to plague the supply side of the equation. With winter coming to an end and production holding steady, traders expect supply to continue to increase until the summer months when air conditioning demand increases.

With demand expected to drop as the temperature increases, more emphasis is going to be put on production. Although a few major producers such as Chesapeake Energy have curtailed natural gas production activity, there has not been enough movement toward shutting down rigs to suggest a trend is developing. As long as the rig count remains high, supply is going to remain high. This will mean losses are likely to continue to extend until at least July when demand for natural gas is expected to pick up because of increased electricity use.

Technical factors may drive up prices this week. The closing price reversal bottom suggests that sellers may be backing away from the short side because of low prices. This doesn’t mean they are considering the long side, it just means they are more willing to buy back their short positions at current levels so that they can short again at higher prices. This type of “backing and filling” trading is likely to occur more frequently over the near-term as prices continue to drop.

Factors Affecting Natural Gas This Week:

Weather:  Spring begins this week in the U.S. but temperatures have already been unseasonably high. This could mean a hot and dry summer which could lead to more electricity use. Increased electricity use will drive up demand for natural gas, but this scenario is not likely to develop for months.    

Supply and Demand:  Even when there is a drawdown in supply, the amount of natural gas being used is well below the 5-year average for this time of year. Overproduction continues to be the main issue.  

Chart Pattern:  Last week’s closing price reversal bottom could trigger a 2 to 3 week rally, but following a 50 percent retracement of the last down move, traders should look for renewed selling pressure.

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