November natural gas futures eased Monday in a lackluster session showing no interest in following through on Friday’s hefty 17.2-cent jump. At the close November had lost 1.5 cents to $3.688 and December had given up 5.7 cents to $3.903. November crude oil fell 42 cents to $86.38/bbl.
Top traders see Monday’s action as somewhat noncommittal but in the larger picture note that those types of days are consistent with an eventual market turnaround. “In Market Profile we have a nontrend day, which means that the market failed to trade higher or lower in the first hour of trading and not only does it show a lack of direction, it also shows a lack of conviction,” said Tom Saal, vice president at Hencorp Futures in Miami.
“Longer-term traders simply sat on the sidelines. Maybe the funds were hoping that they could either sell into a higher rally, and maybe the hedgers were ready to buy, but only if it went lower. Neither event happened so the market did nothing and that is usually what happens on a nontrend day. You usually see them at the end of a price move and we know which way this move was going. That is a pattern for reversal,” said Saal.
Another indication that suggests the market is ready to head higher is that “the market showed the classic sign of a reversal on the weekly bar chart. We made a new low for the move [last week] and settled above two prior weeks.”
November futures settled at $3.703 on Friday Oct. 14, ahead of the previous Friday at $3.481 and the Friday before that at $3.666.
Market Profile is a unique method of studying market activity and in the process of price discovery looks for prices to return to prior value areas in both short- and long- term time frames. Value areas are determined by plotting prices in the form of a distribution and as the market trades, distributions are formed and patterns can be observed where the market tends to gravitate, much like the mode on a standard bell curve.
These value areas form price objectives. Saal points out that “the decline was pretty orderly,” but identifies $3.979 as a “value area target.”
It was a tale of two exchanges as data from the Commodity Futures Trading Commission showed contracting open interest at the IntercontinentalExchange and increasing open interest at the New York Mercantile Exchange. In its Commitments of Traders Report for the five trading days ended Oct. 11, long futures and options positions (2,500 MMBtu per contract) held by managed money at the IntercontinentalExchange fell 27,926 to 260,938 and short futures and options declined by 23,768 to 114,046.
Managed money at the New York Mercantile Exchange did the opposite. Long futures and options (10,000 MMBtu per contract) increased by 5,955 to 123,518 and short positions rose by 8,300 to 242,852. When adjusted for contract size long futures and options at both exchanges fell by 1,026 and short contracts increased by 2,358. For the five trading days ended Oct. 11, November futures fell 2.2 cents to $3.616.
Analysts see little change in market fundamentals but sense a change in market psychology. “Even though the gas market seems sold out and due for some type of rally, few participants were willing to step up and buy the market. The psychology seemed to change late Thursday [last week],” said Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm.
“We had a gas storage number that should have been considered bearish, but when the market failed to sell off, it seemed to spark a round of short-covering. On a fundamental basis, the gas market continues to look negative. But we would not rule out some type of short-covering rally over the next couple weeks,” he said in a weekend note to clients.
From a risk management standpoint, DeVooght counsels both trading accounts and end-users to stand aside. Producers and those with exposure to lower prices should continue to hold a strip consisting of November-March $4.75 put options offset by the sale of $7 calls for a 16- to 20-cent debit.
Near-term weather forecasts show a cool Southeast and warm Southwest. In its six- to 10-day outlook, MDA EarthSat predicts cooler-than-normal temperatures south and east of a broad arc extending from Pennsylvania to Illinois to Louisiana. “The forecast has held mostly consistent over the weekend. The core of the strongest cold has shifted into the one- to five-day period, though a lingering day or two of much-belows appears likely in the Southeast early,” the forecaster said.
“The lack of a stable cold air connection should allow for some brief, marginal warming at mid-period before a secondary round of belows arrives in the central U.S. late. This pattern has the support of the MJO [Madden Julian Oscillation], which will be traversing through its cooler phases one and two, as well as what should be a negative spike in the AO [Arctic Oscillation]. Confidence [in the forecast] remains moderate to high.”
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