Buoyed By Crude, Gas Futures Notch All-Time Highs

What a difference a week can make when you are dealing with the volatility of natural gas futures. As recently as last Friday when prices carved out a $4.98 low, it appeared that bulls had turned in their horns and donned their bear coats for the winter. And why not? Storage injections were picking up, demand was light and technicals had turned negative. $4.50 here we come, right?

Not so fast...

In a move that will not soon be forgotten by bull nor bear, natural gas futures spiraled as much as 27 cents higher yesterday to set a new all-time high as traders lifted natural gas prices in sympathy with spiking crude oil. Adding to Wednesday's 37.4-cent increase, November finished 12.2 cents or 2.2% stronger at $5.63 yesterday. By comparison, November crude rocketed $2.81 or 8.5% higher to close at $3.606 amid heightened fears over an impending Middle East crisis.

Sometimes called a correlation of convenience because it only tends to manifest itself when it is in the same direction of the overall trend, the crude oil-natural gas price relationship is a shaky one. Yesterday morning, while crude was already a dollar higher in overseas markets, natural had barely budged and, following a little strength in the overnight session, opened less than two pennies above Wednesday's $5.508 November close. In fact, Access and OTC markets before the open were so quiet yesterday that they resembled corn futures, said George Leide of New York-based Rafferty Energy Group.

However, after realizing what was going on in the nearby crude and heating oil pits, natural gas bulls were fast learners Thursday. "Crude and the rest of the petroleum complex had already taken the next leg up.. Traders were looking around saying we've got to buy something and natural gas was it," Leide said.

Another astute market watcher agreed and pointed to the bullish API data released Tuesday as the beginning of the price rally. "A $1.00 price move in crude is usually good for about a 20-cent rally in natural. What we saw Wednesday was a delayed reaction on the part of natural to the more than $1.00 advance in crude on Tuesday. The delay was just a little shorter [Thursday]," he said.

Looking ahead, Leide warns that this is the most difficult type of market to trade because of the lack of reference points at this price level. That said, he is advising his clients to look for a series of lower lows and lower highs to give clues for when to enter the market on the short side. "You've got to be nimble up here. The only safe way to trade it is look for weakening momentum and put your stops in tight. Getting egg on your face is bad no matter what time of day."

If the market is able to move lower, he looks for support first at $5.59 and then again at Thursday's low of $5.52. Below that level, there could be additional stickiness at the $5.395-400 chart gap that was created by the move lower on Sept. 28, he said.

Alternatively, the aforementioned market watcher targets resistance at $5.89 today, which corresponds with the up-trend line that supported prices from July 26 through September 27. That line has the slope of 4 cents a day. And while does not rule out a test of resistance up there today, he believes pre-weekend profit taking might trim this week's gains Friday.

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