Category: Weekly Detail

Spoke over the weekend about a technical formation that has the “potential” for issues with Nat gas. It has to deal with the developing inverted head and should pattern in the Daily chart. Not saying that this will happen but would be remiss in not bringing it to you attention. The chart above has the two shoulders and the inverted head highlighted.

Technical doctrine holds that the mathematical objective of the violation of the “neckline” of a fully formed head and shoulders construction is an extension approximately equal to the distance from the top of the head (in this case the bottom) to the neckline. Using that metric suggests a target of $14 (9.670 – 5.325 = 4.345 + 9.670 = 14.015).

There will likely be two Weekly reports this week as the market performed and interesting technical formation of late. There will not be a Weekly next week as I have my annual fishing trip to Canada late this week and internet service is sketchy at best.

First off lets review last week’s action–While on a trading basis September did fail at lower high ($9.677 v $9.752) on a daily ($9.336 v$9.322) a continuation basis prompt gas set new closing highs. There were new closing highs in the Winter ’22 – ’23 strip ($8.991 v $8.779). To this trader, these are warning signals for the Q4 and Q1 action.

First off– let me apologize for not providing a Weekly yesterday and this on will be brief as I am still trying to overcome a digestive issue that attacked on Sunday.

Consistent with the strength into expiration of almost every month for the last year and a half, expectations were that expiring August would be well – bid before going off the board. Just no one sent my an email that the trade during the past week trade through the June high. Yikes reminds me of the Feb expiration. Needless to say that the activity (primarily an out side month) created some historical technical issues that I will en devour to update on the importance later this week and into the fall.

After trading to a high of $8.417 last week, prices closed the week at $8.299 for a gain of $1.283 (close to close). Clearly extraordinary gains over the last two weeks and left both the prompt August and September well above the commonly watched moving averages.

Despite this week’s strength, the consensus of technical indicators, failed to confirm the recovery with across the board in a positive (supportive) agreement. Due to the continued weakness in market internals- Open interest continued to decline as the market rallied. This week the total fell another +/- 20,000 contracts to the lowest level of participation since early 2016 – Average daily volume declined an estimated 20,000 contracts during the past week. Volume is currently less than the 50 – day average of contracts that has traded each day of the recovery from the 07/05 low with the exception of one. On 07/12 an “outside” day reversal to the downside was traded with the highest volume of any day during July. With the trading days remaining in calendar July, volume to date is estimated at 4,502,359 contracts while calendar June’s final total of 8,407,189– its is looking like July calendar trading has suffered very large volume losses compared to its predecessor.

Prices continued the gains that commenced after July 4th, closing at a four week high. The run took prices over the 20 Week SMA (closing basis) after closing below it for the last three weeks. Over the last fifteen weeks (since early April), prompt gas has traded an average range of $1.334, during the week and only four of those weeks traded less than a dollar from low to high. Coincidentally, the average daily closing price for those seventy trading days is $7.366, the average weekly closing price $7.279. Hedging and speculation require levels of risk management and approaches impossible when the gas market trades nearly 20% of the average value of the contract each week. The inability to manage risk exposure causes participants to withdraw from the market, which further reduces open interest and liquidity. Perhaps volatility will diminish over the next couple of months as prompt gas constructs a series of higher lows and lower highs, developing the summer range discussed previously.

The market has been here before recently. Look at the chart above, and notice the five weeks in December ’21 as the declines were dramatic up to a point and then a “range” developed, creating the consolidation for the break out above in January ’22. This period also had a decline in volume (lower half of the chart) until prices broke out and the volume exploded. A similar picture can be drawn from the current market (though only four weeks) as price consolidated (range trade) only to develop the momentum to move higher. Similar to last December, prices may not “take off” from here but any type of retracement to test initial support at $6.80ish and beyond around $6.42-$6.50 (spot) should be respected.

Trade took prices through and close below first the short and then intermediate term trend lines (support). This move extinguished all but the long – term upside bias for prompt gas. Continue to expect wide trading ranges as the gas market attempts to define support. Prompt gas got way too far over its skis this spring and is making an extraordinarily volatile adjustment…retracing 50% of the rally from the June ’20 low in only sixteen trading days. While that decline/retracement extinguished the near term and intermediate term upside biases the long – term uptrend remains.

During the uptrend that first began following the June ’20 multi – year low a long series of higher highs and higher lows has been discussed here and was clearly observable. Short – term, intermediate – term and long – term trend has been definable with trend lines, by following moving averages and by seasonal and monthly lows. After flirting with violating the short – term uptrend in early May and early June, on 06/21 prompt gas decisively violated the trend line rising from the March – April lows and the 20 – day SMA. That decline and close ended the short – term uptrend. That decline and close ended the short – term uptrend. That same day prompt gas closed under the 50 – day SMA confirmed three days later. That violation was quickly followed by a close below the late April and May lows…the conventional support that comprised the last higher intermediate term low. Closes under the 50 – day and the May low ended the intermediate term uptrend.

Price extended the losses and collapsed below the major support between the April and May lows ($6.247-$6.426) and closing the week below the higher low established during those months. This extension occurred with lower volume (partially due to the holiday), but more important is the decline in open interest. The market is now at the lowest level of open interest since the collapse in Jan ’16 and the Q3 low established in Jul’16. Notice that both of those were lows as the market was struggling with declines and position by the hedging community. Similar to current conditions as traders are not sure how to deal with the one year effects from the war and the LNG situation. It is clear that the recent collapse was partially due to a re-assessment by the fundamental condition from LNG demand loosing 2 Bcf/day (displacing that gas into storage) and the destruction of technical support levels.

So is the bull run over –not sure as if you look at the last lower low, in the chart below, prices traded around the lows for three weeks before breaking out to the upside (2nd chart below).

On Wednesday June8th, dropped over a dollar in just one hour.  Not to be out done, on Tuesday of last week, July surpassed that unusual event by declining $1.588 (from $8.609 to $7.041) in an hour.Substantial declines, by the prompt contract in the couple of weeks (all from a similar resistance area) should tell us something about the demand for futures contracts on either side on $9. 

This past week total open interest fell 42,829 contracts (through Thursday) bringing the two – week total decline to 84,767…the lowest number of futures contracts outstanding since Labor Day 2016.  It has been discussed here on several occasions, during the rally of ’22 that the level of open interest has contributed mightily to price volatility…both to the upside and downside.  Given the continued lack of participation in hedging, either long or short, expect continued price volatility. 

Last week was quite something as a new Q2 high was traded on Wed, through the May high (prompt gas has now traded $6.128 or 173.3% above the December 30th – “Q1” low) and then through last week’s low. On Wednesday July dropped $1.119 (from 9.546 to 8.427) in just an hour. Yee Haw.

In past weeks the historical seasonal pattern of prompt gas between around the Memorial holiday (05/15 and 06/15) has been discussed. Over the years prompt gas has consistently traded a pre – Memorial Day high, fallen to a post – holiday/early June low and then rallied into mid – June. June before going off the board and July since has essentially followed the historical script with astounding and uncharacteristic volatility. The ten – years average of early June rallies is 16.65%. From Thursday’s (06/09) low July rallied 14.1%.