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Natural Gas Fundamental Analysis – Forecast for the Week of December 5, 2016

By:
James Hyerczyk
Updated: Dec 4, 2016, 05:39 UTC

Natural gas futures closed higher for the week, but finished on a down note on Friday as investors took profits ahead of the week-end. Natural gas futures

natural-gas-weekly

Natural gas futures closed higher for the week, but finished on a down note on Friday as investors took profits ahead of the week-end.

Natural gas futures for January delivery finished the week at $3.436, up $0.2340 or +7.31%. Despite Friday’s setback, the market is still within striking distance of challenging two-year highs.

Last week’s rally was fueled by forecasts of colder temperatures. After an unusually warm fall season, temperatures returned to normal for this time of year in November, setting up the market for a strong rally into the end of the month.

Thursday’s weekly U.S. Energy Information Administration’s inventory report showed that natural gas stockpiles drained 50 billion cubic feet out of storage last week. At the end of the week, total natural gas stockpiles stood at 3.995 trillion cubic feet, 0.6% above levels from last year and 6.25% above the five-year average.

weekly-january-natural-gas
Weekly January Natural Gas

Forecast

Friday’s price action highlights the divergence in the natural gas market between short-term and long-term chart watchers. Short-term traders apparently see the market as overbought. Additionally, they may feel that the new forecast for colder temperatures has been fully-priced into the market.

The price action on the daily chart also suggests that speculators may have entered the market last week. This is usually revealed by a vertical price rise. Professionals on the other hand, prefer to see more diagonal price action. What professionals may be trying to avoid at this time is a runaway market like that which occurred in October when price rallied too far ahead of time.

Essentially what the market may be saying at this time is it’s too early to get overenthusiastic about the coming cold and that a better support base may have to be created. I tend to agree with this assessment. Therefore, I expect to see some light selling pressure early this week, but nothing strong enough to change the trend to down. It should be just enough to alleviate some of the speculative buying pressure.

The direction of the natural gas market early in the week will be determined by whether investors have already priced in the coming cold weather. High pressure is expected over the eastern U.S. after the weekend cold blast to bring a return to above normal temperatures and lighter than normal demand Sunday through Wednesday. However, the cold is expected to return to the central U.S. and then advance to the East late this week to increase demand from moderate to high.

I’m thinking we may see a break early in the week tied to Friday’s technical reversal top, but enough buying is likely to come in to prevent a wash-out to the downside. I’ll be looking for value on any weakness because I don’t believe the rally is over.

My weekly charts show a lot of resistance at $3.592, $3.675 and $3.850, but if these areas are taken out with conviction then we should rapidly approach the psychological $4.000 level.

The best support zone is $3.206 to $3.145. I don’t think we’ll get as low as these areas given the current weather pattern. If the market does collapse into this zone then it would indicate that the longer-term forecast may be indicating average to above average temperatures in December.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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