Category: Weekly Detail

Q2 Run May Have Materialized

Weekly Continuous

The seven week rally that began following May expiration, has left the gas market severely overbought and delivering multiple clues that suggest the spring rally has run its course. The decline in open interest is one of those clues. Higher price highs without increasing open interest indicating new buying support entering the market, is a form of divergence.

Higher price highs accompanied by lower volume is another (occurring the last couple of weeks) is one that has proved exceptionally reliable over the years. During week ending 05/24 3,387,217 contracts changed hands, this past week a higher high traded with 3,075,538. The high of $3.159 may not be the Q2 high but there is a growing body of technical evidence that will be hard for the market to overcome including in addition to the foregoing:

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A Weekly Reversal of a Reversal

Weekly Continuation

Spoke a couple of weeks ago about Natural Gas’ tendency to define a bias shift as the price changes direction at a support or resistance area and reverse direction on a high volume week. Now we get a reversal higher last week, from and area that had supported the market previously (just below $2.50) and then found support. The lows of last week were just above the 40week SMA, before finding the bid and running upward to end the week over the downward sloping trend line (from the Nov ’23 high and Jan ’24 highs) that had held the market for the first 6 months of the year.

Volume during the last week was high, averaging 574,278 contracts per day. This was significantly higher than the previous week, but well short of the previous reversal week which averaged over 663,000 contracts per day. Similar to the previous reversal week- open interest declined slightly last week. The reversal last week left prices in the extreme over-bought zone for the Weekly RSI but not the Daily RSI, signalling a slight divergence.

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Historical Expectations Carry Trade

Weekly Continuous

Pre/post Memorial Day price weakness nearly always leads to an early June low followed by one of the most historically consistent rallies during the calendar year. Last week’s declines (expanding the Holiday weakness) was on schedule. Now the question is does the historically reliable seasonal tendency during the early summer of that weakness into June expiration lead to a recovery rally by the July contract in place. Prompt July has traded through the calendar May high in each of the last three years.

Given the high volume weekly reversal just traded week before last expect, June weakened further into expiration…the last four expiring contracts have done so, confirming the recent trend. Given the premium currently awarded to the July contract last week suggests further extension of the Q2 rally. After a “correction”/end of seasonal weakness, expect an historically consistent seasonal rally. The 10 – years average of those rallies is about 17%

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Test of Trend Line — Reversal

Weekly Continuous

Prices rallied last week up to the declining trend line off of the late October high (Nov expiration) and the early Jan ’24 high, before running out of buyers. The Memorial Day weakness that has been recently discussed showed up after a strong close the previous week June opened a little higher and stretched the rally to $2.756. Following a little weakness the prompt traded a high volume reversal to the upside on Wednesday with the most contracts traded in a day since 02/21, and closed at $2.798, the highest daily close since 01/17. June’s close was its second highest this year (v $2.808 on 01/09). The pre – holiday price pressure showed up the next day. June traded into a band of resistance between a couple of mid – late January daily reversal highs (and the aforementioned trend line), where the soon to expire prompt printed what is the odds on favorite for the May high at $2.924 and reversed lower with even more volume. Follow through weakness on Friday left June $.404 off its high just a day earlier…and a high volume reversal on the weekly chart.

High volume weekly reversals have long been the gas market’s favorite method of communicating that it has traded to and failed at a significant, unsustainable (at least temporarily) high. Reversal or not, exceptionally high volume weeks are almost always noteworthy events in the natural gas market. For example, the last three times that more than three million contracts were traded were:

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Price Action Closes Above Key Averages

Weekly Continuous

For several weeks the possibility/likelihood of a short covering rally similar to the December/early January rally has been discussed here. This past week’s trade is what a short covering rally looks like. The surprise was that open interest actually increased from Thursday through Thursday (remember that reporting of open interest statistics lags one day). Remember that when a contract is bought to “cover” one previously sold short open interest is reduced by one contract. Rather than falling, the total increased by 519 contracts and if the exchange’s estimate for Friday is anywhere accurate that total was reduced by 287 contracts…an addition of 232 contracts over six trading days when prompt gas gained $.325 on a daily closing basis. This would lead to the logical conclusion that at least an equal number of new contracts were bought to those bought to cover an existing short position…that combination of buying pushed the bid steadily higher, and is when all is said and done, a technical positive.

From its contract low on 04/15 $1.907, June gas has rallied .747 or 39%. The rally from mid – April through Friday’s close is the largest increase in a prompt June contract of the last ten years, but only slightly larger than the ’23 rally ($.654, 32.2%) that peaked at $2.685 on 05/19. As surprising as the extent of the rally from the May low may be, it is still not all that different from a year ago.

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Consolidation Begets Small Rally

Weekly Continuation

The consolidation pattern that permeated the market for the last two months (with slight advances) has developed a solid base for the summer. June reversed higher from support and ended the week strong (above the March/April highs, the continuation 20 – week SMA (for the first time since the January high and the historically important January low). The rally was extended toward resistance defined by the December low, 38.2% retracement of the decline from the January high to the March Q I low and the wide “expiration” gap left following February expiration. For three days June traded around that resistance, each day finding support at the upper boundary of the trading range that June defined between mid – March and the beginning of May. On Thursday the prompt reversed higher from that support and traded to the highest price since late January (with strong volume (the highest daily turnover since 02/21).

June settled back from a higher high on Friday, $2.344, to end the week at $2.252 (the highest weekly close since 01/26), still well short of closing the aforementioned “expiration” gap (a fraction of which remains open between $2.344 and $2.411) and 50% retracement of the Q I decline ($2.437). Given increasing volume and what appears to be relatively modest short covering there is a significant likelihood that June won’t turn back down until the resistance above is seriously challenged.

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Prices Remain Firm

Weekly Continuous

June traded through and closed above the April high ($2.092) making it the 15th time in 17 years that prompt gas has traded through the calendar April high during May. June also closed above declining trend line resistance, which will likely now serve as support as well as the March high and above the continuation 20 – week SMA for the first time since first two Fridays of 2024.

June’s rally was impressive, but it stopped short of narrowing the “expiration” gap left following February expiration and well short of well – defined conventional resistance presented by the December low closing above that gap would approximately equal the average of historical rallies from Q1 lows to Q2 highs. Volume was a little higher this week (a technically positive point, but just equaled the 20 – week average). Open interest was higher as prompt gas rallied, also a technical positive.

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Expect the Same Until It Doesn’t

Weekly Continuation

Friday’s contract expiration was remarkably reminiscent of the last days of the March and April contracts. May traded a new low for its tenure as prompt just as the two immediate predecessors, at $1.482, before settling at $1.614 (granted the low was traded in the early morning with little or no volume).

With May off the board at $1.614 the June (soon to be prompt) closed on Friday at $1.923, $.309 premium…nearly a dime (actually $.099) more that May was awarded over April and $.105 more than April over March. Deferred contracts have constructed their own trading ranges (discussed recently), each of which have ultimately been violated to the downside as the expiration of those contracts approached. April’s range was +/- $1.70 to $2.00 before it broke down to settlement day low of $1.481. The calendar March low was $.03/dt lower than the February low. May’s range during April’s turn as prompt was nearly the same as April’s had been except the upper limit was a little lower. Prompt May also broke down to a settlement day low ($1.482, holding .001 above the March low before recovering). Unless new prompt June falls $.442 during the last two trading days of April $1.482 likely, will be the April low, the first higher monthly low since October. Just to continue the analogy, a year ago the April low was $1.946, $.002 higher than the calendar March ’23 low. May ’23 traded that low on 04/14 rather than coincident with expiration and then settled higher at $2.117 (suggesting a departure from the established pattern).

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Range Events Create Limited Analysis Insight

Weekly Continuous

Previously, the low of May’s tenure was $1.686 ( inside the targeted zone of support, on its second day as prompt). This past week May finally took a couple of shots at closing the “expiration” gap left open on 03/27, neither quite made it. On the 16th May traded to $1.649, on the 17th to $1.660 which leaves a remnant of the gap between $1.647 and $1.649 still unfilled. Perhaps close is good enough natural gas does not like a vacuum, do not be surprised if May completes the task during its last week.

Contrary to that expectation is May’s reaction when it came close -the first time it ripped higher, trading to $1.802 in less than an hour. During the hour before May printed the week’s low 14,008 contracts traded, during the hour that low and reversal traded 50,239 (which makes me think that more than a few participants were paying attention to that gap and scrambling to get out of positions). Since May faded into the close setting up another test (total open interest fell for the first time in five days) it could only have been short covering, but $.153 in less than an hour serves as a good example of how quickly prices can disappear in a thin market.

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Working Hard For the Money

Weekly Continuation

The week before last week, gas traded a total range of $.200, further defining already well – defined support and resistance this last week it traded a range of $.212. This last week after opening a little lower May reversed, rallied through last week’s high only to fail at its 50 day SMA and a trend line declining from its late January and early March highs. A daily reversal on 04/10 (very similar to the reversal traded exactly a week earlier on 04/03), preceded the largest daily loss of May’s tenure and with the highest volume. Support near the upper limit of a zone between May’s February and March blocked a test of the target zone ($1.600 – $1.700, and the “expiration” gap left on 03/27 .

The entire range traded during April, ($.237) is less than half of the range and well within the extremes traded during March ($.528, $1.481 –$2.009). The range traded during February was $.657, in January $1.355. Range contraction typically occurs, at or near the end of a downtrend as a “sold out” market attempts to define a base. Less common is a high volume price spike lower, which is characteristic of “capitulation”, followed by reversal also with significant volume. Given the persistent, extraordinary level of open interest the less common resolution not completely out of the question, but recent trade has the earmarks of the construction of a classic base.

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