Natural Gas Still Has Space To Fall

January Natural Gas

January Natural Gas futures declined to a multi-year low at $2.229 earlier in the week, but selling dried up, triggering a short-covering rally and enough upside momentum to put the market up for the week. If it can finish the week over $2.291 then a technical closing price reversal bottom will form. This will be the first sign that the buying is greater than the selling at current price levels.

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This could prove to be difficult because the fundamentals remain bearish. Production remains strong and the commodity's demand continues to fail to keep pace with the supply surge. Stockpiles held in underground storage in the lower 48 states reached 4 trillion cubic feet (Tcf) for the first time ever. The current storage level is up 11.2% from last year and is 5.5% above the five-year average, according to the latest data from the U.S. Energy Information Administration.

At this time of the year, weather should have the biggest influence on prices. However, so far, winter has been slow to arrive. Sure, snow blanketed much of the Midwestern and Great Lakes states over the week-end, but this wasn't followed up by a lingering cold spell which would've led to increased demand.

Instead of the weather influencing the price action this week, the mechanics of the futures market seem to be exerting the biggest influence. With the December futures contract set to expire, short-sellers have been scrambling to cover their positions before expiration. This is creating an artificial bottom, but nonetheless, could prove to be an important technical formation especially since the market is technically oversold.

According to current data from the Commodity Futures Trading Commission, the number of bearish traders outnumber bullish traders by about 2 to 1. So even though supply continues to build, there is the possibility of a short-term bottom simply because investors may not want to add to current positions at this week's current low price levels.

Technically, the main trend is down according to the weekly chart, however, a close over $2.291 on November 27 will create a potentially bullish closing price reversal bottom. Although this chart pattern may form this week, it will not mean much unless there is a follow-through rally next week.

The trend is not likely to turn up even if the chart pattern is confirmed. However, it could lead to the start of a 2 to 3 week correction. Gains could be limited initially because the first upside target is only $2.415. The rally will gain traction over this level with potential targets at $2.600 and $2.665. Since the trend is down, sellers are likely to come in at these targets.

This week's price action is likely to be determined by personal preference. If you trust that supply is going to continue to grow then your choice is to sell weakness, hoping the pressure is strong enough to continue through last week's low at $2.229, or wait for a relief rally into a retracement zone.

Natural Gas Stocks

The sell-off in the natural gas futures market is being reflected in natural gas stocks including Range Resources Corp. (RRC), Southwestern Energy Co. (SWN), and Cabot Oil & Gas Corp. (COG).

Range Resources Corp. (RRC)

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Range Resources Corp. is in a downtrend on the monthly chart. However, there is a slight divergence developing between the stock and futures price action. Last month, the stock hit a low of $27.55. This low has held so far in November even with the futures contract reaching a new monthly low for the year.

Value-seeking buyers may be coming in because prices are nearing multi-year bottoms at $23.77 from 2008, and $22.80 and $21.74 from 2006.

Southwestern Energy Co. (SWN)

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Southwestern Energy Co. reached its lowest level since May 2005 this month, but it also took steps to shore up its financing while it rides out the severe drop in natural gas prices. Last week, the company announced that it entered into a $750 million three-year term loan agreement and used its proceeds to pay down balances under its existing credit facility and commercial paper program. The move is designed to create long-term value to its shareholders.

This stock should be put on a watch list since there are no signs of a bottom yet on the weekly or monthly charts.

Cabot Oil & Gas Corp. (COG)

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Cabot Oil & Gas Corp. is a stock to watch this month for technical reasons. The main trend is down according to the monthly chart, but the market is currently testing a key retracement zone of its March 2009 bottom at $4.46 and its February 2014 top at $41.78. This zone is $23.12 to $18.72.

Investor reaction to the price level at $18.72 will determine whether the stock will rebound back to $23.12, or continue to weaken into its April 2012 bottom at $14.42.

Keep in mind that natural gas related stocks are likely to find support at value area, but they will need a catalyst to rally. The catalyst, of course, will be higher natural gas prices.