Weather and Storage Are Keeping Sellers in Control
The new week started with natural gas futures gapping lower on the weekly chart. The price action suggests it was follow-through selling rather than a weekend event.
Coming into the new week, bearish traders already have their catalysts, the favorable weather and the huge storage numbers. So unless both the weather and the storage numbers turn bullish at the same time, rallies are likely to be limited and more downside pressure can be expected.
Most weather forecasts are calling for mild temperatures until at least November 5. This should weigh on demand. When you combine low demand with high production, you get a bigger storage build. If the favorable weather lingers for longer then demand will remain weak and production above average. This is what traders reacted to last week and could react to again this week.
Technical factors could play a role in this week’s price action. Both the most active December futures contract and the deferred April Summer strip futures contract are nearing long-term support areas and by some measures oversold. But if you wish to trade counter-trend on price and an oscillator, your gains may be limited by the bearish fundamentals.
Oversold conditions at relatively cheap prices with a surprise cold snap would be necessary to extend any rally. Otherwise, I think new short-sellers will be waiting for a rally to re-enter at more favorable prices.
The Curve Is Still Pricing a Mild Winter
Traders are going to roll over from the November to the December futures contract later this week. The open interest indicates that many traders have already done so. If you’re trading the nearby continuous, which I strongly suggest you shouldn’t, be prepared for a big gap on the chart because the spread between November natural gas and December natural gas is about $0.475.
As far as the deferred contracts are concerned, the price levels at this time of year and the chart patterns indicate that professionals are anticipating a mild winter because of the Super El Nino. This could mean less demand because of relatively warmer temperatures in the North and on the East Coast. Production could also remain steady because of lower risk of freeze-offs.
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See all Natural Gas forecastsWeekly December Natural Gas Futures Technical Analysis
Early Monday, December Natural Gas futures reaffirmed the current downtrend when it took out a multi-month low at $2.945. The break to $2.932 sets in motion the possibility of a closing price reversal bottom.
The main trend is down according to the weekly swing chart. A trade through $3.652 will change the weekly main trend to up.
As mentioned earlier, the first objective was hit at $2.945. Persistent selling pressure throughout the week will put the next downside target at $2.748 on the radar.
The number we’ll be watching all week is $3.047. This is last week’s close. Since we already had the lower-low on the weekly chart, a close on Friday above $3.047 will produce a weekly closing price reversal bottom. This won’t change the main trend to up, but if confirmed, it could lead to the start of a 2-to-3-week counter-trend rally.
Weekly April Natural Gas Futures Technical Analysis
The summer strip April natural gas futures contract is also in a downtrend. A trade through the main top at $3.052 will change the main trend to up. Trades through previous swing bottoms at $2.366, $2.237 and $2.173 will reaffirm the downtrend.
The minor trend is also down on the weekly chart. A trade through $2.712 will change the minor trend to up. This could shift momentum to the upside.
Last week’s close at $2.443 is the number to watch on the weekly chart. Given the earlier lower-low, a close above $2.443 will form a closing price reversal bottom.
What to Watch
December Natural Gas Futures
My bias leans to the downside because the main swing indicator is down and the market is well below the 52-week moving average at $4.118 that is also a trend indicator as well as resistance.
A sustained move under $2.945 would put $2.748 on the radar.
Overcoming last week’s close at $3.047 will weaken my bearish outlook. Closing over $3.047 will not change the trend to up, but it could make the market vulnerable to a rally to at least $3.292.
April Natural Gas Futures
I’m starting the week bearish because of the downtrend on the weekly swing chart and the direction of the 52-week moving average at $3.045. My outlook will weaken if the market closes the week above $2.443. A confirmed closing price reversal bottom could fuel a 2-to-3-week counter-trend rally to $2.552 to $2.590.
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