January Natural Gas futures are set to finish the week sharply higher for a third week after gapping higher on the opening for a second consecutive week. The price action suggests the market may be overbought by some technical measures. Confusion over the latest weather forecasts may also be encouraging investors to book profits ahead of the week-end.
Most of this week's gains can be attributed to Thursday's bullish U.S. Energy Information Administration's weekly report that showed supplies of the heating fuel fell by 50 billion cubic feet for the week-ended November 25. This came out almost exactly as forecast by analysts. However, traders reacted with a strong response on the idea that back-to-back weekly drawdowns represent a bullish trend.
Total stocks now stand at 3.995 trillion cubic feet, up 24 billion cubic feet from a year ago and 235 billion cubic feet above the five-year average. Looking at it another way, that's about 0.6 percent above levels from last year and 6.25 percent above the five-year average.
It seems to me that confusion over the use of "cooler" and "colder" temperatures in the forecasts is affecting the price action.
After struggling through an unusually warm October-November time period, followed by cooler temperatures, new forecasts show colder temperatures spreading across most of the country starting next week. This is helping to reduce worries that a glut of supply will continue to pressure prices.
Traders should note…
January Natural Gas futures are set to finish the week sharply higher for a third week after gapping higher on the opening for a second consecutive week. The price action suggests the market may be overbought by some technical measures. Confusion over the latest weather forecasts may also be encouraging investors to book profits ahead of the week-end.
Most of this week's gains can be attributed to Thursday's bullish U.S. Energy Information Administration's weekly report that showed supplies of the heating fuel fell by 50 billion cubic feet for the week-ended November 25. This came out almost exactly as forecast by analysts. However, traders reacted with a strong response on the idea that back-to-back weekly drawdowns represent a bullish trend.
Total stocks now stand at 3.995 trillion cubic feet, up 24 billion cubic feet from a year ago and 235 billion cubic feet above the five-year average. Looking at it another way, that's about 0.6 percent above levels from last year and 6.25 percent above the five-year average.
It seems to me that confusion over the use of "cooler" and "colder" temperatures in the forecasts is affecting the price action.
After struggling through an unusually warm October-November time period, followed by cooler temperatures, new forecasts show colder temperatures spreading across most of the country starting next week. This is helping to reduce worries that a glut of supply will continue to pressure prices.
Traders should note the change in the price action and volatility this week with the mention of "colder" temperatures as opposed to "cooler" temperatures. This usually brings in the headline readers and the speculators. And speculators often stop rallies, or put them in an overbought positions.
If the market closes lower on December 2, they are going to have to conclude that the market has reached overbought status.
This doesn't mean the trend is getting ready to turn down, but it could lead to the start of a short-term correction on the daily chart. The weekly chart also indicates the market could use a correction because the rally is too steep.
One thing that investors and speculators may have learned after the October "crash and burn" rally is that natural gas is an unforgiving market if you pay too much and are on the wrong side of a correction. A market that moves diagonally is more constructive for a longer-term rally. A vertical rally usually ends in a crash. This week's price action suggests that professional traders want to avoid overheating prices before the official start of winter.
The forecast for cold weather has gotten the market more excited after a steady move of higher-tops and higher-bottoms on professional buying the past few weeks. Friday's price action suggests the return of speculators, but we won't be sure until we see the latest Commitment of Traders report.
After professional traders laid the groundwork for the rally by driving out the weak longs during most of November, the market is currently in strong hands so I expect the rally to continue as long as there is cold weather in the forecast. However, prices must be attractive enough to continue to attract fresh buying. This is why I approve of the need for a short-term correction of the rally.
From now on until the end of winter, bullish trend traders will be playing for long, lingering cold fronts to control the price action. They will also want to see the downtrend in weekly supply continue. Forecasts for cooler or warmer temperatures will produce wild swings so investors should continue to monitor the weather going out at least a week on a day-to-day basis.
Technical Analysis
(Click to enlarge)
The main trend is down on the weekly chart. It will remain down until $3.675 is taken out with conviction.
The main range is $4.686 to $2.500. Its retracement zone is $3.592 to $3.850. This zone stopped the rally in October and it is currently providing resistance.
At this time, I'm playing for a pullback into a value zone with my best entry price $3.1450. If the weather forecast continues to indicate only moderate demand then I'll probably get my price.
If buyers come in at $3.1450 then the next rally could be the move that over takes the retracement zone at $3.592 to $3.850 and the main top at $3.675. We're not going to get a rally this winter unless the buying is strong enough to take out these prices.
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