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Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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Is The Natural Gas Rally Over?

Tanks

August Natural Gas futures surged to the highest level since the week-ending October 16, 2015 earlier in the week, but sellers came in at $2.812 to stop the rally on concerns the market had advanced too far, too soon. Seasonal traders also came in to take advantage of the high prices based on historical data that shows the market has a tendency to reach a top at this time of year.

Traders did show some resilience, however, by rallying on Thursday, shrugging off bearish stockpile data as traders continued to focus on the weather and the possibility of strong summer demand.

According to Platts Analytics, the hotter weather has increased power demand. Consumption grew about 1.5 percent month-to-date to nearly 67 billion cubic feet a day, despite expectations the recent price surge would lead power plants to seek cheaper fuel.

Power generators continue to burn coal and natural gas to meet consumer needs during this unusually hot June. With weather forecasts calling for a hotter-than-average summer, many traders feel that this usage trend is likely to continue, helping to underpin prices. There is also a general optimism building in the market that a rebalancing is taking place, and this is also providing support.

Fundamental traders cite the high inventories as one reason why the current rally is unsustainable. Inventories as of June 17 reached 3.1 trillion cubic feet, 25 percent above levels from a year ago and 28 percent above the five-year average for the same week, according to the U.S. Energy Information Administration. That puts it on pace to set a record high going into the winter.

The weekly chart pattern also suggests the rally may be overextended. However, we are going to need a valid chart pattern to determine if our assessment is accurate. The chart pattern is a closing price reversal top.

(Click to enlarge)

Given the prolonged move up in terms of price and time, we are looking for a close under $2.668 on June 24 to tell us that the selling is greater than the buying at current price levels. If confirmed, this chart pattern may not change the main trend to down, but it could provide some relief by fueling a 2 to 3 week break equal to at least 50 percent to 61.8 percent of the last rally.

The main trend is currently up according to the weekly swing chart. It will turn down on a trade through the last swing bottom at $2.157.

The main range is 3.223 to 1.990. Its retracement zone at 2.607 to 2.752 was the primary upside target. The market has been struggling with this area for three weeks, which suggests the presence of sellers. Earlier in the week, buyers attempted to break above this zone, but the move was met by aggressive selling. It could’ve been profit-taking or aggressive shorting.

Holding below 2.752 will be the first sign that sellers are coming in to prevent the rally from continuing. A break below the 50 percent level at $2.607 will signal that the selling pressure is increasing. A close below $2.668 on Friday will be another sign of increased selling pressure.

If a top is formed at $2.812 and the market begins to settle under key retracement levels, then look for the selling pressure to increase. This could lead to a 2 to 3 week break into $2.485 to 2.407.

(Click to enlarge)

August Crude Oil futures posted a two-sided trade this week. The price action was fueled by two events. The initial rally was supported by a larger-than-expected stockpiles drawdown according to the American Petroleum Institute, but this rally was thwarted by a weaker-than-expected U.S. Energy Information Administration report.

Later in the week, crude oil prices firmed as investors increased bets the UK would vote to remain a member of the European Union. This rally was capped by the news that the Brits had voted to leave the EU. This news shocked the financial markets, leading to a 6 percent drop in crude oil prices immediately after the release of referendum results.

Over the short-run, the so-called Brexit (British Exit), should cause volatility in all markets with a bias to the downside for crude oil because of the stronger U.S. Dollar. Eventually, traders will make the right adjustments to risk and crude oil will settle into a range. Over the long-run, crude oil demand could suffer if Brexit pulls the UK or the Euro Zone into a recession.

Technically, the main trend is up according to the weekly swing chart. However, upside momentum has slowed since the rally stalled at $52.28 two-weeks ago.

The main range is $64.08 to $32.22. Its retracement zone is $48.15 to $52.28. This zone is currently providing resistance. It should also be noted that trader reaction to this zone should set the longer-term tone of the market.

Taking out $52.28 will signal the presence of buyers and demonstrate that they are willing to buy strength even at seven month highs. However, a failure to overtake $52.28 will indicate the presence of sellers. If they can overcome the buyers then look for the market to expand to the downside under the 50 percent level at $48.15.

This could trigger a break into the short-term retracement zone at $45.21 to $43.54. If the selling is strong enough to take out this zone then look for an acceleration into the next zone at $42.25 to $39.88.

Conclusion

While the decision to leave the European Union by the UK voters may be a historic event, it’s probably too early to tell what its long-term impact will be on crude oil prices. Over the short-term, we could see a volatile, two-sided trade as the British Pound adjusts to the news and investors decide how much risk exposure they have.

Based on this assessment, we could see crude trade over the 50 percent level at $48.15 several times before heading into our downside targets.




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