After nudging barely lower than the previous week’s low, January Natural Gas rallied sharply higher off this level, forming an outside move on the weekly chart and a closing price reversal bottom. This pattern suggests that a temporary bottom may have been formed. It does not indicate a change in trend is taking place, but usually indicates the start of a 2 to 3 week rally equal to at least 50% of the last move down.
Although technically oversold for some time, last week’s reversal bottom was triggered by a combination of a smaller-than-expected build in U.S. gas inventories and the forecast for cooler temperatures. Both of these factors have bullish traders pinning their hopes on a pick up in demand while giving short-traders a logical reason to begin covering their positions.
Last week the U.S. Department of Energy reported that gas in storage rose 9 billion cubic feet. The number was smaller than the 19.5-bcf build forecast and marked the second consecutive week this has occurred. Another week of smaller builds or an actual drawdown could mean sentiment is shifting to the upside. Before getting excited, however, keep in mind that by historical standards, inventories remain high. Seasonally, prices may begin to rise since last week was the week that inventories usually top, but don’t count on it.
Even if the weather cools, any rally is likely to be triggered by short-covering rather than fresh buying. This is because there is no shortage of gas following a fall season of mild temperatures and rising inventories. This means that traders should continue to focus on the short-side of the market especially if natural gas rallies 2 to 3 weeks or reaches a significant retracement level. Because of the possibility of quick reversals like what occurred last week, traders should be careful about selling fresh lows.
Factors Affecting Natural Gas This Week:
Weather: The 15-day forecast is calling for cooler temperatures. This is expected to increase demand which could offset any fresh injections.
Supply and Demand: There is still plenty of supply available as drillers continue to dump virtually free product on the market. Demand is expected to rise, but no one is certain whether it will be enough to produce a drawdown in inventory. Weekly guesses have been on the high side lately, missing the actual number. It is possible that the inventory report will show an actual drawdown this week.
Oversold Conditions: Technical indicators such as stochastics and relative strength have indicated oversold conditions for some time, but this hasn’t scared any of the shorts out of the market. There is an old adage that states “the only thing that cures low prices is high prices.” Last week’s reversal bottom and the market’s inability to follow-through to the downside may be signs that short traders have finally decided to pull in their profits.
By. FX Empire
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