Category: Weekly Detail

I did not think that the gap in the Daily Chart would be filled during November trade (pink line above), but like other events I am wrong. There was never a doubt that the gap would be filled (that’s because Dec was trading north of the gap at $3.34), but filling it with November has some implications. As mentioned in the Daily, the fact the gap was closed is important but prices did not close the day above that gap ($3.047), which leaves it unconfirmed. More importantly, when the market closes above (the Nov or Dec contract) the level around $3.00-$3.04 it will then become support (what was resistance becomes support) for a potential extended period of time. That said, should Nov remain above this area, expect Dec to at least test the zone during its tenure. The longer the zone remains support it may be the base for a period of weeks.

This rally has been based on some sort of fundamental driver and should that driver be mitigated then prices may trade around this area or below for a few sessions and possibly into and through expiration. If the driver remains and this area become support then its a new world for the near term and you have to look at higher prices for resistance because a floor has been established.

When trading opened last week on a run and didn’t look back, rejecting the the $.369 decline of the week before and closing above the gap from last November. The market traded to the highest level since before the Nov ’19 highs but did not contain the technical indications supporting additional gains, instead they evidence shows that the rally was on short covering (more below) when prices eclipsed the 50 day SMA. Open interest in the prompt contract declined over 100,000 contracts (over 30% of total) which is significant this far before the expiration process and the fund rolling period.

In previous discussions, there were four years when November commanded a large premium as October expired. Those four hears between ’04 and ’09 were afforded a premium between +/- $.62 and $1.47, this year’s was $.694. Each of these previous years there were some similarities to trade after the October expiration. 1) The expiration gap that resulted from the premium was reduced but the gap was not closed until the following year. The low, so far for Nov has not closed the gap from the Oct expiration; 2) the Q4/seasonal high had yet to be traded (the earliest was at the beginning of December’s tenure as prompt), this year’s has yet to be defined; and 3) November constructed a volatile trading range, The first two weeks have had above average true range.  Last week’s action left the Nov contract at a $.64 premium to October expiration where it started the month. The last week’s range continued the range expansion of the last four weeks ($.47+,$.525, $.769 and $.375) supporting the concept of entering a volatile trading range environment.

Prices did not close the expiration gap but dove into a large chunk of the premium afforded the November contract. The declines fell short of the expiration high at $2.32 and nowhere near the October expiration at $2.101 nor the high of expiration day at $2.176

The November premium began to reduce as soon as October was off the board, even though prices closed the gap from November ’19 on the first day as prompt. From there November contract traded an “outside” month and closed below the November contract August low and its 20 – week and 200 – day SMAs.

A wild week for gas prices as prices started weak and tested the lows from late July, trading down to $1.795, then finding support and rallying prices back up to the initial support from the collapse the week before at $2.275. While prices pushed above that level briefly, they settled the week backing off.

While prices have had a wild ride with the October contract ($.53 range between high and low), the same cannot be said for the November contract ($.41 range). The premium afforded to November expanded and is approaching an extreme level.

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.