Natural Gas Analysis For The Week Of October 24, 2011 (UNG, FCG, UNL, CHK, DVN)
FX Empire: After starting the week sharply higher, confirming the previous week’s closing price reversal bottom, December Natural Gas futures closed lower for the period. The rally early in the week marked the formation of a minor bottom for the first time since early July, but the weak close put the market in a position to make a new low for the year.
Based on the short-term range of 4.871 to 3.747, it is still possible but not probable that enough buyers can show up to drive this market into the 50% price level at 4.309. In addition, downtrending Gann angle resistance comes in at 4.311. This makes 4.309 to 4.311 a key resistance cluster this week.
Since the main trend is down on the weekly chart, short-sellers are likely to refresh following a test of this resistance area. Although a reversal bottom often becomes a major bottom, due to the recent extreme bearishness, it may take this market several weeks to set up for an actual change in trend. In addition, a break through 4.747 will negate the developing formation.
Fundamentally inventories remain at an elevated level. However, a report of a drop in the number of rigs drilling for gas provided a slight boost to prices on Friday. This news seemed to overcome the bearishness created by the high level of supply. Traders are now pondering whether the change in the number of rigs represents a one time event or the start of a trend. Despite the drop in rigs by 9 from the previous week to 927, production issues continue to outweigh demand.
As long as production continues to rise, look for pressure to remain on natural gas. Talk of an early winter could trigger additional short-covering, but it is going to take a long, lingering cold snap to put a serious dent in the more than ample supply in storage.
Factors Affecting Natural Gas This Week:
• Short Covering: The large number of traders holding natural gas short positions means that pressure is likely to remain on the contract. It also means that conditions are oversold and ripe for a short-covering rally at any time. If pressing the market lower at current price levels, speculators have to be careful not to get caught in a short-covering rally. Based on the large number of open positions, it may not take much to fuel a strong counter-trend rally.
• Supply and Demand: With production continuing to rise, it is going to take a huge shift in demand to chase the weaker short-traders out of the market. The news that the number of rigs drilling for oil fell last week is encouraging, but traders are likely to wait for a trend to develop before declaring a possible change in the supply/demand situation. The best scenario for a rally will be a drop in production and increased demand, but that may be asking too much.
• Weather: The weather in the Midwest and on the East Coast remains relatively mild. Last week’s cold temperatures came and went without much fanfare so traders should not expect to see any significant change in the supply numbers. Any change in the 6 to 10 day forecast calling for colder temperatures could trigger a short-covering rally.
By. FX Empire
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Related: First Trust ISE Revere Natural Gas Index Fund (NYSE:FCG), United States Natural Gas ETF (NYSE:UNG), United States 12 Month Natural Gas ETF (NYSE:UNL), Chesapeake Energy Corporation (NYSE:CHK), Devon Energy Corporation (NYSE:DVN).