Category: Weekly Detail

This week’s decline left the March contract and the deferred contracts below all closely watched moving averages. These levels have the weekly closing price at lows not seen since late September ‘20. Readers are no doubt familiar by now with the technical presumption that arises when price ends the week below the prior week’s low. More meaning is added to that presumption when the close is at a multi – year low. discussed last week about the market developing a “bases” or a consolidation range for which prices can rally or decline.

Primarily because of the gas market’s persistent extremely oversold condition my thoughts were strongly suggesting that the twelve – trading day range since the beginning of February was likely the initial stage of the construction of a defensible low. Undercutting the consolidation range puts that theory to rest (for now) but does not change the current extreme position the market is in nor the expectations of the near term future. Beyond that, acknowledgement that the historically disproportionately important January low, which withstood another challenge, there is little to add other than the eighth decline in nine weeks has left the consensus of technical indicators (which improved a little last week) profoundly negative, some indicators more oversold that at any time in the history of trading natural gas futures.

Have mentioned it every week for the last three and sure you are tired of hearing the over-sold condition of the market and that there will be a substantial short covering rally coming (just trying to figure out from where). Wanted to bring it into context by looking at the most recent CFTC data but they did not update data to last Tuesday in the weekly report on Friday– so the analysis is a little late but likely the same interpretation. Take a look at the charts below: The first the Weekly Continuation with Total Open Interest and Volume and the second is the CFTC report through the latest data.

The ellipses hi-light the trade November 6, 2022. Total OI was at 984,593 contracts and the Speculative shorts represented 180,931 contracts of the total. Obviously, the chart shows the enormous run that the speculative shorts have brought to the market, currently sitting at 250,915 contracts (growing 69,984 contracts). Total OI has grown to 1,168,247 contracts (growing 183,654 contracts). In the recent decline in prices the speculators are responsible for nearly 40% of the recent declines. It is little wonder that warning of the upcoming short covering rally (not sure from where) has been mentioned here.

Despite the rally on expiration (almost reminded me of several expiration’s last year) prices closed the week lower for the sixth consecutive week– clearly a bearish indicator for the week coming. Along with that expiration, March did not follow the gains rather, closing the week $.25 below the expiration of February.

Early indications have the week gaining open interest (even with expiration) with gains in volume week over week. The losses do come with an RSI reading that is in the extreme zone (chart below is after the Sunday opening).

Prompt gas closed lower for the sixth straight week (each week since the peak of the seasonal rally to a mid – December high – a one week uptick following a two week decline from the November high). Over those weeks, on a closing basis, prompt January and then February have fallen from$7.024 to $3.174. That kind of decline is not unprecedented, but it is rare and it has been a long time since last occurring.

There are other mathematical indicators that are used to monitor the overbought/oversold condition of the market, one such tool looks at the percentage the market trades as compared to the 40 week Simple Moving average. At Friday’s close prompt gas was 53.7% below the now declining intermediate – long defining moving average. You may recall at the high weekly close during August prompt gas was 54.5% above the 40 – week. Over the history of natural gas trading there has only been one other comparable rally and decline that carried to similar extremes.

The uptrend that first began following the June ’20 low, was conclusively ended when the calendar December close for prompt gas was below the trend line drawn from that multi – year low and the December ’21 low (See Monthly Continuation chart above). That does not mean that the gas market is headed to zero or even back to test the last multi – year low, but the downside momentum that began to be generated by the bearish momentum divergences that accompanied the August high is likely to take some time to be completely neutralized. While it may not seem so, price volatility has actually decreased…the weekly ATR (the average range of the last fifteen weeks) has fallen from $1.413 on 07/29 to $1.091, over the last few weeks from $1.155. This week’s range was $.874 the narrowest since mid – November.

That said, a volatile rally is overdue. Over the last four weeks since the seasonal early – mid December high on 12/13, prompt gas has fallen from $7.105 to $3.520 (over 50%). In the process the gas market has finally reached an extremely oversold technical level. The weekly RSI ended the week at 24.29 that has the “leading” indicator, lower than that for one week during October, which was followed by a weekly reversal and a rally from $4.750 to $7.604.

The warming weather trends last week took prices down to test levels of support that have not occurred since a year ago. As discussed last week the market has a tendency to develop a key level around the 1st of January.

…late December/early January highs or lows have consistently been disproportionately important going forward into each new year.

Follow through buying took the prompt to $7.058 before a reversal lower. Another one on Tuesday in the opposite direction set the week’s high at $7.105 testing the resistance from the intersection of the 20 – week SMA and the still rising 40 – week SMA. From those levels, prices immediately retraced and closed the gap from Monday and closed the week in the middle of the range.

The results left prompt January $.355 higher, but examination of individual monthly gains in the winter prices, showed an interesting divergence. Weekly gains of February were over $.20 except for March. Sandwiched between February’s + $.221 and April’s +$.229 was March at +$.037. Chances are (guesses really) are that difference was a result of substantial buying of January and February while simultaneously selling March– sometimes referred to as a near – term bull spread. Building length in the remaining winter while offsetting that length in March. With strong volume in that spreading would indicate that folks are expecting additional winter strength in early 2023.