Last week, April Natural Gas traded in an inside range, indicating that it may be going through a transition period. This should come as no surprise to chart watchers because two weeks ago when the market formed a closing price reversal bottom, I warned that there may be a 2 to 3 week rally equal to at least 50 percent of the previous swing down.
After bottoming at 2.438 on January 23, the market proceeded to confirm a weekly reversal bottom, but its subsequent follow-through rally fell well short of its first upside target at 3.102. The inside week could be indicating pent-up demand. If it is strong enough, it may create the upside momentum this market needs to reach this first target.
Since the main trend is down on the weekly chart, in all fairness, I have to mention that maybe the move from 2.438 to 2.942 was all the upside action that bottom-pickers and those covering shorts could offer. If this is the case then a retest of the low is in order.
Based on the short-term range of 2.438 to 2.942, the 50 percent or pivot price of this range is 2.690. The weekly close at 2.656 is under the pivot, indicating a slight bias to the downside. The key range to watch is 3.765 to 2.438. This range has created a retracement zone at 3.102 to 3.258 which is the market’s primary upside target.
Before April Natural Gas can even launch a rally into the primary retracement zone it is going to have to take out a downtrending Gann angle at 2.890 and a short-term high at 2.942. A move through these two levels should draw enough interest from traders to drive the market into its first target zone. Besides the price action, it is highly suggested that traders monitor the volume and volatility prior to and at the point of the breakout. Without these two factors, any breakout is due to fail.
Last week the U.S. Energy Information Administration reported that total gas inventories fell by 78 billion cubic feet to 2.888 trillion cubic feet. This was well below analyst estimates of 87 billion cubic feet. At first the market declined, but a quick intraday turnaround enabled the market to post a slight gain. After that, the market succumbed to the same sideways trading action that has been the highlight over the past two weeks.
The main reason for trader indecision is storage concerns. High gas production because of improved fracking techniques has led to the creation of a huge inventory surplus. This drilling practice coupled with low demand is leading traders to believe that prices are likely to remain under pressure throughout the entire year.
Veteran commodity market traders will tell you that the cure for low prices is the implementation of production cuts, but production is still running at an all-time high. Chesapeake Energy is planning to cut production and the number of rigs in production has been falling, but drilling has become so efficient that production hasn’t been dented. The main fear is that winter is going to end with supply at its highest level in history.
The U.S. winter so far has been the second mildest in over 60 years. This has caused a huge drop-off in usage, driving up inventory. If this trend were to continue then given the high production number, natural gas in storage could reach full capacity my mid-year.
Recently, President Obama mentioned in his State of the Union Address that the time was right for America to better utilize its natural gas resources. This brought smiles to the faces of producers and triggered a short-covering rally. The bottom produced by this action is still intact at 2.438. This may be a sign that producers believe that the President is sincere. Production numbers haven’t confirmed this however.
This week is critical because the charts indicate the market is trying to bottom. While a breakout to the upside will be a sign that short traders are getting nervous, it will still not be enough to say the trend has turned. This will only take place when the market begins to take out old tops and right now the nearest top is at 3.675 on the weekly chart.
Factors Affecting Natural Gas This Week:
Weather: Cold weather hit the Midwest and East Coast over the week-end, but it is not expected to last long. In addition, unless there is a lingering cold snap, demand is not expected to exceed supply. This late in the season, weather has been reduced to a non-event.
Supply and Demand: Production remains high and continues to exceed demand. Until producers begin shutting down rigs and trimming production they run the risk of ending the winter season with the highest amount of gas in storage in history. This will lead to storage problems later in the year.
Chart Pattern: The closing price reversal bottom formed and confirmed two weeks ago is still intact, signaling the potential for a rally to at least 3.102 over the near-term. This pattern will be negated if the bottom at 2.438 is penetrated. Even if this rally occurs, the main trend will remain down until a main top is broken.
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