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Since bottoming at 2.071 in April 2012, Natural Gas futures has posted its largest rally in over a year. However the move is still only a retracement in a bear market since no significant tops have been violated.
Technically, the monthly chart clearly defines the prolonged downtrend in terms of both price and time. Firstly, the downtrending Gann angle from the 19.453 top in July 2008 has controlled the direction of this market for over 4-years. During August this angle drops in at 3.773. A breakout above this angle will be a sign of strength, but since the main trend is down, the first test of this angle is likely to encourage fresh selling.
Looking at the short-term range of 5.827 to 2.071 from June 2011 to April 2012, a retracement zone has been formed at 3.949 to 4.392. Combined with the downtrending Gann angle, these prices should combine to form solid resistance if tested.
Since upside momentum appears to be slowing, traders should watch for a possible near-term top. Based on the 2.071 to 3.277 range, a break back into 2.674 is possible. A move to this level will be critical to the market’s long-term chart pattern because establishing support at the retracement price will mean the formation of a secondary higher bottom. Typically during the bottoming process, the first rally off of the lowest price is short-covering while the second rally is indicative of new buying. It is suggested that patient traders wait for this to take place rather than chase the market at current levels.
Supply issues drove the natural gas market lower because of overproduction, but now that the number of producing wells has dropped, supply has stabilized somewhat. There is still an abundance of gas in storage, but this year’s hot summer has driven up electricity demand in a wide area that is helping to alleviate some of the inventory. Additionally, talk of reducing the usage of fracking as a means of obtaining natural gas has also helped to curtail production.
Although prices have risen recently due to increased demand and lower production, natural gas inventories still remains near historically high levels. This could become a problem as summer comes to an end and demand triggered by air conditioner usage diminishes. The market could see a little blip in demand near the U.S. Labor Day holiday in September when firms begin to lock in prices for winter usage, however, unless production drops further, natural gas is not likely to advance too far above the recent high at 3.277.