Category: Weekly Detail

Last week continued the consolidation process in a fairly tight range. It may turn out that the prompt June extends the rally toward the upper boundary of the developing triangle ( trend line declining from the October – November and February highs, the current value of which is 3.256 in the Daily Chart above). There is historical precedent for June extending the rally later during its tenure as prompt. In ’19 the high of June’s tenure as prompt didn’t trade until 05/20, in ’18 June’s high traded coincident with expiration. From a historical stand point — since 2007 prompt June has traded through the calendar April high in 12 of 14 years (the only exceptions were ’14 and ’19) . The first trading day of May this year made it 13 of 15.

Prices were well supported last week during the expiration process and with the first couple of days for the June contract as prompt. The action led to a higher weekly close for six of the last seven weeks. That just leads to confirmation of the recent bullish bias trend that has permeated the nat gas market of recent weeks with little or no fundamental reasons (at least the fundamental traders haven’t highlighted any to me recently).

Market internals show last week’s volume basically flat to the previous week and both of the last two week’s volume down from earlier in April. For an extension of the rally beyond $3.00, the bulls would like to have volume increasing as prices have gained in the last two weeks. Momentum indications (Daily and Weekly RSI being lagging indicators) are reaching the higher side of the range but are not over-bought. The weekly Bollinger band analysis also confirms that the trade is likely near the top end of the new range but prices could work another dime higher before signalling potential issues.

Last week prices trade through the resistance that limited the upper boundary of the recent short term trade and closed above it. While this type of event usually has supportive technical implications, the market internals (volume and open interest) did not, but it should be noted that the daily outside reversal on Thursday did occur on above average volume. This is all very short term interpretations and doe not alter the medium and longer term analysis that this web site has provided over the last few week. It is not uncommon for prompt gas to return to test the validity of “new” support (or resistance) once violated becomes support. Perhaps we will witness that type of action this week as the market heads into expiration.

Several positive technical aspects occurred in last week’s trade–prompt gas closed above the upper boundary of the recent range that has held action with the highest weekly continuation close since late Feb (2.854) and above the 10 Week SMA for the first time since that same week. Unfortunately, the second straight weekly gain came with decreased volume (this week average daily volume fell by an roughly 15,000 contracts while total open interest fell for the third straight week.  Look at the chart below:

As many of you know already– commodity markets have been on a tear for 2021, many since last July. Copper, gold (though not of late), corn, soybeans the list goes on. Many pundits have referred to as a super-cycle in the commodity trade. Yet with all this bullishness, gas has not been able to hold onto the gains made late last year and have constantly retraced. Grant you prices are higher this year but it does not seem as strong as most of the other commodities. This website has discussed several times last fall and winter the “bias change” that was occurring in the gas market and with all the discussion about the super-cycle, it is time to update the charts.

Notice in the charts, the multi-year low late last June (interesting timing with the commencement of the other commodity rallies), the market has set a series of higher highs and higher lows. The one exception was this February when prices could not exceed the previous high from Nov by a few pennies. Other than that– the gas market has maintained a significant premium to the June ’20 lows. This activity may represent the development of a more bullish environment for gas in 2021.

Spoke in Good Friday analysis about the declining volatility that the current market had been maintaining. Nothing changed last week as the prices remained in a tight range environment, seemingly going nowhere. Maintaining above the 200 day moving average but closing just below the 40 Week Moving Average, prices seem to want to test the low end of the current range $2.45-$2.42 and very well may but the key is what happens upon that test — a break below will likely bring the lows from last Dec into play a test and failure will send a much different signal.

Going back to the volatility and lack of it in the current market and the potential impacts for future prices. Look at the chart below, it represents the continuous price movement (upper pane) and the daily range for prices over the last 14 days (lower pane):

History shows that more often than not seasonal lows trade with declining volume. Volume on Sept 22nd was substantially less than the volume of the day before or day after. The retest of the late Dec low (also a relatively lower volume day) on January 22nd when the January low was traded at 2.414. The technical indication is that whatever downside momentum that was carrying prompt gas to that low, was or was about to be exhausted. Another way of analyzing this the sellers were running out of participation to drive the bid lower. Perhaps, a variation of that pattern is going on right now. A week ago, April gaped lower on Monday, traded quietly in a range for a couple of days then spiked down toward a test of the January low. Interestingly, the volume on 03/18 exceeded that of 01/22 by more than 100,000 contracts, suggesting that there may be enough additional selling (discussed here) to challenge the conventional and moving average support (the 200 day SMA was 2.447) and leave prompt gas below the trend defining 40 week SMA. Since that spike lower with 415,730 contracts traded the market has preformed an “outside” day reversal to the upside (March 24th). Average daily volume for week ending Mar 26th declined an estimated 80,000 contracts from a week earlier and was the lowest since the holiday shortened Christmas week. Perhaps there is additional selling waiting, but last week’s expiration suggests that volume has sufficiently dried up to indicate that there has been a successful test of the January low during March, looking like an intermediate term low with of the construction of the lower boundary of a trading range.

Some additional support for that view can be found in the change in open interest. The last three meaningful increases in the total number of contracts outstanding were on 03/12 (when selling continued into the weekly close, suggesting lower prices were in store when trading resumed discussed here), 03/15-when prices began the next week with a gap lower, and on 03/18-when April tested the 200 day SMA and January low. Those increases indicated that short sellers were throwing increasing positions significantly, attempting to drive it lower. These actions proved successful the first two times. April fell from a high of 2.714 on 03/11 to that 2.422 on 03/18. Since the 03/18 low open interest has declined each day indicating that gains have been significantly attributable to profit taking (the rally around expiration can also support this view) and does suggest that weakness should be bought near term.

April started its prompt role with a slight rally only to succumb 10 days into trade, left a gap on the declines, that remained as resistance until last week. The brief run closed the gap but there was unable to additional progress. Soon to expire prompt traded through a previous week’s high and recorded a gain for the first time in five weeks. This all occurred on declining volume which leads this writer to conclude that the chances of April expiration above that of March’s ($2.854) at slim to none.

Now May comes into the spotlight as prompt on Tues. In the chart above the May contract also had a gap that finally closed last week. It also traded we with in the range between $2.49 and $2.64 similar to the range in the April contract. Some interesting developments in the open interest and volume that I want to dive into and explain later in the week. Not sure where the April is going to end, but regardless, May is likely to come back to the April close if it is weak and/or if April closes strong, May will likely try to extend those gains.

As most of you know, I have discussed over the years, the seasonal tendencies in natural gas, with the Q1 of the fiscal year showing weakness; Q2 bringing strength in prices; Q3 typically weak for prices; and the Q4 is met with support and stronger prices. Last year had some abnormal aspects to this historical pattern. The Q1 low came on time at the end of March; the Q2 high came in May after only a 13 day run; the q3 lows came at the end of June trade on the July expiration; and the Q4 high came in early November, a common theme. The Q1 low for 2021 seems to be December 28th low at $2.23 unless the coming six days bring a test. After last week’s failure to expand the lows significantly– not sure there is enough action to test and break the Dec low.

That being said, there seems to be great interest in moving prices lower as the Chart below shows. It seems that the Managed Money Shorts have recently blown out their position in the last couple of weeks. Since the middle of February the short position has nearly doubled and now stand at nearly 200,000 contracts. Looking at the price movement– it seems the sector sells the contract at the beginning of the week (the CFTC data is dated on the Tuesday of each week) as that is when the significant declines have occurred in the last couple of weeks.

The rally to the February high confirmed intermediate – long term resistance. This zone remains between the October high, 3.396, the November high,3.393 and the February high, 3.316. Prompt gas now needs to define (or redefine), support as discussed in the Daily for the last two weeks. Obvious conventional support is the zone between the December and January lows (2.238 – 2.414), but above that is the trend line rising from the June and September lows and the 40 – week SMA. The coming week’s value of that trend line is 2.493 (on a monthly chart basis the value of the trend line is 2.521).

It should also come to your attention, that the speculative interests have once again entered the market on the declines of the last week or so. Notice in the chart below, that after remaining dormant or reducing for the last couple of weeks — they have increased positions with the recent breakdown.

Have discussed in the Daily about the market wanting to test and eventually define the low end of the range trade that will develop (it has for the last few months). Last week was a start to develop a low — not sure it is over as technical points to further declines. Prices have now set two consecutive weeks of lower closes which is bearish but the declines of those weeks have occurred on much lower volume and declining open interest. Looking at the chart below — significant volume and open interest characteristics in this weekly continuation chart shows the volume spike that accompanied trade through the December – January highs, but perhaps more important the change in open interest. Total open interest had steadily declined since early November (nine of ten weeks) but then increased for three straight as prompt gas rallied. Increasing average daily volume and open interest along with price is a substantial technical positive. During the price weakness of the last two weeks both declined.

Of additional input is the changes as to what group has been selling into the recent declines- It should also be noted that the producer community has awakened to the capacity of hedging future prices. The chart below identifies the level of selling forward production as reported to the CFTC.