Category: Weekly Detail

Price action in commodities usually have a regression to the mean after spending an extended period of time at extremes. Trading greater than 2 standard deviations above the 20 week SMA for five consecutive weeks is trading at an extreme. While there was a relaxation of that extreme the week before last, the market was due for a regression at some juncture. Last week, the regression took prices back to the 200 day SMA, the 40 week and the 20 week SMA before finding support.

Currently, the market remains within the extremes from the August price behavior. With all of the moving averages poised in a tight range (a nickel range) just below, an additional break down like last week seems unlikely.

Suggesting for the last couple of weeks, that prices need to retrace the gains since the beginning of August. The last two weeks have eliminated the over bought status driven by the momentum indicators. The Fibonacci retracement went just down to the 50% support zone (from the lows in late July to the highs last week) see Chart below.

The declines are in-line with the the historical averages for declines from either side of the holiday. Now, the market will need to wade through the sentiment associated with the late year rally (occasionally concurrent with forecasts). Heard some whining during August, from many folks arguing against the well bid market when storage inventories are clearly going to be over 4 TCF. This is a fundamental concept that I ignore, but I remembered a few years ago when they ended over this level so I thought I would go back and look at what happened to prices. In 2016, prices rallied strong in October to correct some of the gains in early November then was well bid well into the winter. In 2015, after coming off declines most of the summer and fall— prices collapsed with a slight rally early in Dec. before resuming the declines, setting the stage for a multi-year low in March ’16. So there are two potential outcomes regardless of ending at 4 TCF, looking at history– yet another example of the value of technical analysis.

Mentioned yesterday that some of the differed contract to the October contract were at substantial differences. Above is the October contract to the November, while it looked to be converging last week– yesterday’s action took it back to where the spread was at the beginning of Aug. It is clear that the market has some concern about the upcoming winter– regardless of the fundamental conditions. The gap between these two months (premium afforded to November) usually closes in early trade when Nov takes over as prompt. There is an exception to that expectation and will dive into that year later in the week. For now, focus on 2002, 2005 (do not weight 2005 as high due to the tropical influence) and 2013. Either the Nov contract has to come back to the Oct or the Oct has to chase Nov and diminish the premium.

I was expecting the Nov to decline in the seasonal weakness but it did not, in fact, expanded the premium. The market and prices are clearly indicating something but it is too early to tell. Be aware though of these premiums in your trading decisions.

Last week preformed what a consolidation market should– prices stayed in the recent range (inside to the previous week) with neither a lower low nor a higher high. That allowed some of the technical indicators to moderate as the Weekly RSI retraced from being in the extreme over-bought area, but remains in the over-bought zone. The Bollinger Band study has prices just at the 2 standard deviations above the 20 week SMA, which is starting to correct from it’s recent extreme level of nearly 3 standard deviations over the SMA.

This price behavior and movement is consistent with recent run during August and now it will be important to identify the support zone that the market should establish, likely from the historical weakness in prices during the Labor Day time period.

Some noteworthy events occurred last week with the expiration of the Sept contract. Expiring at 2.579 (highest settlement since last Nov), the 2020 Sept contract jolined three other years in the last twenty years to remain well bid into expiration. The historical trend is for weakness to carry the market during the Sept expiration due to its proximity to the Labor Day holiday. In each of those three prior, Sep contracts that were well bid were, in ’02 a reversal from the Q3 ’02 low confirmed an uptrend that did not culminate until a Feb ’03 spike above $11.00. The second year was in ’05 and hurricane drama events took prices on to a December spike to over $15.00. The third year was in August ’13 when a bounce off of the Q3 low did not end until the following February (very similar to ’02). Due to the similarities to historical events it may be prudent for traders and hedgers to understand that with natural gas price movements sometime rhymes.

Have been discussing the last couple of weeks, the need for extended bull markets to “feed the bull”. This event is confirmed with gaining open interest on higher volume. While prompt gas has closed higher for four consecutive weeks, volume has steadily declined and open interest has continued to decline over the period with short positions having to cover. These two events occurring will not support an ever increasing price level.

Suggested in the Daily last Friday, that against the technical instincts that the market showed, it may rally against the consolidation for prices, similar to the week prior and decline. Sure enough, prices started weaker, per the expectations, only to take off on a nice outside daily reversal pattern, finishing near the highs of the day.

With that said, it should be noted that the rally has taken prices near a zone, commencing at $2.50 up to $2.60 that has held the market consistently over the last few years. During last year’s run to the Q4 high there have been only four closes above it, all during the run in Nov ’19.

 Following the largest one week gain since the end of the run to the November ’18 Q4 high, the September contract extended the gains another .118/d, to close the week at the highest weekly close since 11/22/19. Expecting a building resistance just above $2.25 and the likelihood of correction back to substantial support, never occurred but buying commencing at the 40 – week SMA of September gas (followed by the hedge funds) ended the potential for lower offers.  The price rebound during the week extended into the close, with higher volume and gains in open interest and a close above the historically important January high is an indication that the September contract will continue to push further before expiration.  The August, September, October, November ’19, April and May ’20 highs of September gas all traded between 2.410 and 2.499 which could be expected as the destination for the recent gains.

While negative price action seems remote, prices will be testing the zone from $2.28-$2.25 and the area around $2.16 before expiration in all likelihood. Testing those areas are not as important as what happens to prices while testing that area.

Mentioned in last week’s blog, a key for near term bias change was a weekly close above the trend line off of the Nov ’19 highs and the May ’20 highs. The market opened above that trend line, then advanced through the resistance associated with the 40 Week SMA (had only closed above that during the Q4 rally 4 times and had not closed above since Feb ’19), and some of the shorts were forced to cover. The CFTC trader’s report noted that the shorts covered 45,839 positions through Tuesday of last week. I would submit that the majority of those occurred on Monday and Tuesday.

Prices then extended the gains, breaking the monthly trend line and formed the highest monthly price in seven months. These events left the market over extended to the upside, with the Weekly trading 3 standard deviations over the 20 Week SMA with the RSI momentum indicator racing to the extreme over bought level. This was achieved on high (but not exceptional) weekly volume and declining open interest (fueled by short covering). It should be stated, again on this website, that rallies based solely on short covering are not long for this world. We saw that last winter and again in May when the shorts stopped the action, prices retraced quickly. Due to this history, this analyst was startled that the bias remained positive for the rest of the week’s trade.

Prices traded back to 1.714 before the expiring August prompt rallying to nearly early July high (1.893 v 1.924) but then fell to expire at 1.854. From there the September contract immediately opened with a gap only to trade slightly above the August, in July, (1.928 v 1.924) failing and gave back the premium it was afforded, trading back into the common range that has held the market for recent months. It ended the outcry session nearly where the August had begun it (1.799 v 1.796). The reversal may indicate the difficulty that the September contract will face in breaking out.

It was interesting that the contract ended the outcry below the trend line on the Weekly, only to bounce before the close of the week, closed nearly on the trend line. Until the prompt gas closes the week above that trend line (from the Nov ’19 high and the May ’20 high), supported by higher volume and gaining open interest, it is likely that prices will remain in this range.