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Natural Gas Analysis for the Week of February 20, 2012

Natural Gas Analysis for the Week of February 20, 2012

April Natural Gas futures finished at a three week high while continuing its base-building process. This is important from a technical perspective because typically, the wider the base, the stronger the impending breakout.

Now that the market has crossed over to the bullish side of a pair of steep downtrending Gann angles, traders are probably setting their sights on the next Gann angle at 2.8050. Breaking through this price along with the January 30 high at 2.9420 is likely to trigger an acceleration to the upside.

The week-ending January 27, April Natural Gas posted a weekly closing price reversal bottom. At the time I noted that this type of bottom usually leads to a 2 to 3 week rally equal to at least 50 percent of the last down swing. Even though the market hasn’t reached its first upside objective, the fact that a solid support base has formed is a positive development. Based on the short-term range of 3.7650 to 2.4380, traders should continue to watch for a possible rally to 3.1020 to 3.2580.

On January 23, natural gas futures bottomed in reaction to President Obama’s comment at his State of the Union Address calling for the United States to pursue a new natural gas energy policy. His comment was enough to trigger the initial short-covering rally that pushed prices away from nearly a ten-year low, but recent favorable supply/demand reports have helped to sustain the bottom-building process.

Late last week, natural gas futures reversed course after U.S. data showed supplies had dropped by more than expected. Short-covering ahead of Monday’s Presidents’ Day holiday also contributed to the week’s 4.6 percent gain.

A few week’s ago Chesapeake Energy announced it was curtailing output activity. Last week Encana Corp. announced it would curb some of its production. I had stated before that one way to stop prices from falling further would be to cut production. This seems to be the most logical alternative since demand has been poor for several months because of the mild winter.

Cutting output may give the market a little boost, but it does not mean a major bottom has been reached. Even the chart indicates that the trend will not turn up until the last swing top on the weekly chart at 3.7650 is violated. The daily chart’s main trend has turned up, but all the weekly chart is indicating is a possible rally to 3.2580 to 3.102 over the near-term.

This is one reason why traders should remain skeptical about the current rally. At best they should expect the short-covering rally to continue, but if it does reach the retracement zone then look for selling pressure to resume. This scenario is likely because demand could take another hit if winter ends with a warmer-than-normal month of March.

Right now, natural gas in storage is poised to finish the winter season at its highest level in history. If it does and production remains steady then it is possible that storage capacity may reach 100 percent by June. Utilities that switched from coal to natural gas while prices were falling may switch back to coal if prices reach 3.000. This scenario fits in nicely with the technical picture.

This week, look for short-covering to continue to push prices to their upper boundaries, triggering buy stops along the way. At some point, perhaps after Thursday’s supply and demand report, the market is expected to accelerate into the retracement zone identified as 3.1020 to 3.2580. At this point, look for the shorting pressure to resume.

Factors Affecting Natural Gas This Week:

Weather: Demand is down because of the mild winter and it could get worse if March experiences warmer-than-expected temperatures.

Supply and Demand: Recent drawdowns in supply have been keeping prices firm, but have not been high enough to offset the drop in demand. Recently, a few energy companies have cut production, but this is probably a short-term fix. The market seems to be on pace to end the winter season with the highest amount of natural gas in storage in history. This does not bode well for the market going into the spring and summer.

Chart Pattern: The daily chart suggests a bullish pattern is developing. Last week the daily trend turned up. The weekly chart is still bearish and the downtrend remains firmly intact. This chart suggests another shorting opportunity if the market reaches a key retracement zone.

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