December Natural Gas futures rallied to its highest level since July 1 before posting a dramatic and potentially bearish closing price reversal top on the daily chart on September 22. Bullish factors continued to support the market this week. These included hot temperatures in the U.S. that have contributed to a natural gas power plat burn, evidence that the year-over-year supply glut is disappearing and the threat of a massive short-covering rally.
The week began with a strong upside bias because of a potentially bullish U.S. Commodity Futures Trading Commission Commitment of Traders report released on September 16. The report showed the shorts covered about 28% of their positions since the last report, closing the previous week with 173,728 open positions. This was also the smallest short position since 2014.
The recent strong closes had put the market in a position to take out several previous tops, setting up the possibility of a breakout to the upside if the buyers were able to overcome the shorts. And that they did on Tuesday, September 20, when a massive short-covering rally took out the previous tops. Although the move looked dramatic on the charts, it was generated by shorts getting out of the market rather than fresh longs entering the market.
This type of breakout move is usually the weakest because it signals to traders that buyers are not willing to pay up for natural gas, and would rather wait for a pullback. The best breakout rallies occur…