Category: Weekly Detail

The last couple of week’s I have discussed that the constant liquidation of open interest (last weeks open interest left the total number of contracts outstanding at a four – year low), had created upside vulnerability. The continuing decline in volume added to this potential instability.   Last week’s substantial increase in volume and open interest during the volatile trade brought about the realization of that vulnerability. It also suggests that the gas market has redefined support within its long – term recovery from the June ’20 multi – year low. It appears that prompt gas appears to have completed construction of a month – long base that likely includes a very significant intermediate term low.

The coming summer strip, which did not close below its 40 – week when the prompt and the one – year did (apart from one week during March ’21 the summer ’22 strip has remained above its 40 – week SMA since early July ’20, (see chart below) gained .342 and has a clearer path toward a test of its early November closing high.

Prices continued the range that has held the market for five weeks now. During this time period there have been some internal development in the broader market that should be noted. First is open interest – it peaked in September at 1,468,636 contracts (during the extraordinary rally), and now has started to fall during the last three weeks of December. These declines have established a year end low of 1,108,463 (the lowest total of contracts outstanding in more than four years) while prompt gas has managed to post three weekly closes (3.690, 3.731 and 3.730). The inability to extend the lows further no several attempts suggests that the gas market has absorbed an historical liquidation and is likely run out of sellers.  High levels of open interest tend to occur when everyone wants to own some gas in anticipation of higher prices, low levels when few do. 

Some food for thought –A year ago prompt gas fell from an early November high to a pre – January expiration low of 2.238 on December 28^th.  Since then that low has never been tested.  This year the February’s pre – New Year’s low traded on December 30^th.  Interesting things often occur around the anniversaries of previous significant events. The summer strip has turned back higher without testing its 40 – week SMA all while prompt and winter prices have faced serious selling.

For whatever reason prompt gas has a habit of beginning (or in close proximity to the beginning) each new year with a significant event and more often than not, that event takes the form of a gap. Not sure if history will rhyme this year, but you may want to consider just a couple of factors:  1) In six of the last seven years began with a gap one way or the other, and far more important, 2) that the January high and low historically carry disproportionate importance.  For example, in 2019 the new prompt February gaped lower on the last trading day of the year.  That gap was filled and the January high traded on 01/15. That high held the market throughout the year.  The January ’19 low was not traded until the 29^th…and was promptly violated on the first trading day of February.  In 2020, there was no gap but the rally in early Jan ’20 set the high for the year. Last year, the market had a gap at the end of December only to rally, rally with a gap at the new year, but prices never challenged the low from the late Dec gap. 

Again, based on all the history we have, whatever the January extremes turn out to be are going to be important to your planning for the year.  It is easy to lose sight of the importance of price levels traded early on.  Just about everyone in the market seems to have interest and more attention to short – term fluctuations but I encourage you to at least give price change during January your attention.  

Nine consecutive contract months have been bid into expiration, with the last six have traded a low between the 15th and 21st. This week’s low traded on Friday the 23rd represents the latest for an expiring month since June traded a low on 05/24 only to rally during its last three trading days. Failure of expiring January to rally before it goes off the board will likely suggest another character change for the market and weakness into at least early ’22.

Multiple technical violations have been discussed as they occurred over the past couple of months. Together these have spelled the end of the year and a half uptrend. That said, also note that on a monthly basis the long – term uptrend remains in effect and the coming summer strip remains above its 40 – week SMA The decline from the Q4 high was exacerbated by the liquidation of open interest and looks to be overdone just as the rally that extended more than 50% above the 40 – week SMA, last fall was.

Discussed it in the Daily last week, but prices preformed a reversal after the early week closure of the Daily and Weekly Gap. Following Monday’s reversal day prompt gas traded quietly (as compared to the to recent volatility), with substantially less volume than the prior week, but on Friday the declines declined below last week’s low by $.013 to leave a technically bearish “outside” week reversal. This creates a price negative technical presumption and January ended the week in the lower quarter of the recent range traded and on a continuation basis the lowest close since July 16th.

Price action seems to develop the construction of a trading range as prompt gas attempts to define some kind an equilibrium. A year and a half ago prompt gas rallied from its July expiration multi – year low but it wasn’t until August that trade through the May high resolved an extended trading range to the upside and a confirming higher low in September provided some definition to the uptrend.

Following the previous week’s close of $4.132, when trading resumed on Sunday night the first trade was $3.826, creating a substantial gap in both the weekly and daily charts (discussed in the Daily last week). January recovered about $.06 during the day but found selling at the violated 200 – day SMA…the first violation of the 200 – day since April 6th, and then traded down to $3.630 with the highest volume since the reversal from the October 6th high. The prompt worked higher after Monday’s action with both volume and volatility (and open interest) diminishing. The high traded on Friday afternoon but still left January $.207 lower with a weekly continuation gap between $4.042 – $3.965. This action has left the the short term momentum indicators severely over-sold.

Since the October 6th high prompt gas has fallen $2.836 or 43.9%, while the summer ’22 strip has lost only $.117 from its close on October 6th, equaling 3%. It should be noted that the summer strip posted its its last high on 11/27, $4.334 and has fallen from that high to a low 18.8% from that high. Total open interest continues to fall as traders show little interest in either speculation nor hedging at this point. Will look at total open interest this week and if there is some interesting aspect to the declines — will update during the week.

While prices rallied into the December settlement that settlement was below November (the first time a prompt has settled lower than the prior month since April settled discount to March) suggested that the character of the uptrend had changed, Tuesday’s decisive violation of the conventional support surrounding 4.70, the 20 – week SMA for the first time since early Q2 confirmed those assessments. The average of the declines from the fall (winter) over the last 20 years is 37.9% – the declines from the Oct 6th high to the low last week was 37.5%.

While prompt gas lost $1.345 this last week (the largest one – week decline since late February ’14 ($1.526), prompt gas remained above the rising 40 – week SMA (currently 3.905), though looking at the declines in the after market on Friday, expect that level to be tested early this week. The last time that prompt gas approached the continuation 40 – week SMA was over a five-week period during March and April before beginning the rally that resulted in the October high and the summer and fall’s bullish bias. The time before that was just prior to January ’21 expiration when the soon to expire prompt traded to $2.238 and seven weeks later the February high printed at 3.316.

For the ninth consecutive expiration, the contract rallied during the process. I have no clue as to why, but in this case the rally in the expiring Dec contract price exceeded the Jan contract periodically during the”take-off”. December’s rally was the first monthly settlement value lower than the previous month since April settled below March– this action confirms the loss of upside momentum during calendar November and suggests a period of consolidation.

The contracts in the Q2 months and months more distantly deferred broke out to and closed at new highs. A week ago, the technical evidence indicated increasing sponsorship for the deferred gas. I mentioned last week that it was likely that the December would rally into expiration, however more restrained than the November contract. Failure to rally (continue the historical trend) would have been an indication that the character of the uptrend had changed. December’s rally confirms the bias remains in place.

The lows of the last two weeks and the October low, have been within a band of support between the November and December ’18 highs that prompt gas broke out through during September on the way to the October high (Q4 high to date). Multiple attempts to penetrate that well – defined support tends to confirm (especially after the downside momentum generated by last week’s decline) to that breakout level’s significance.

Eight straight contract months have rallied into expiration. The Friday before November went off the board it closed at $5.280. Three trading days later it settled at $6.202. I have no knowledge of why that trend of the last 8 months shouldn’t continue, but I doubt it will have the same action of the expiration of last month. Expect the low end of the range to be tested during the week, but also be prepared for the trend consistent rally.

After six weekly closes in a tight range prompt gas broke down through the 50 – day SMA which is the first close under the widely watched moving average since April 21st. The breakdown from the contracting consolidation pattern, suggests that the October 6th high may provide the the traditional Q4 high. Over the last twenty years prompt gas has declined by an average of 37.9%, 40% over the last ten years from its Q4 high. A year ago prompt gas declined 34% from an early November high to a late December low. Since the early October high the prompt price has fallen from a high of $6.466 to $4.725, a decline of $1.741 or 26.9%.

While the front end of the maturity curve was technically damaged and punished, with the winter strip falling $.705, the Q2 ’22 months closed an average of only $.082/ lower; the summer strip only $.068. This suggests the possibility of the the massive liquidation of bull spreads (liquidation of nearby contracts while buying to cover short deferred contracts).