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Futures Rebound as Weather, Direction in Question

After trading lower in the overnight Globex session to just under support at $7.180, December natural gas rebounded during Tuesday's session, recording a high of $7.600 before settling at $7.534, up 11.8 cents on the day.

The other winter months also rebounded Tuesday with January settling 15.1 cents higher at $7.998, while February and March closed higher by 14.3 cents and 15.3 cents, respectively, at $8.058 and $7.938.

One broker noted that while fundamentals remain important, there is also something else at play in the natural gas futures market. Jay Levine, a broker with enerjay LLC, said the market "reassessed its faults [Tuesday] -- namely bearish fundamentals -- as the complex rebounded quite nicely off the day's lows with yet another reversal.

"It doesn't take a leap of anything to realize that fundamentals remain in control, although I'd also remind you that there's still nothing cheap about current energy prices, and while that means the complex will remain susceptible to sell-offs, something, other than fundamentals is still holding the complex up and...will continue to do so, one way or another," Levine added. "Risk/reward might just be as fragile, and open to interpretation, as the fundamentals could be under the right or wrong circumstances."

He added that he would not be surprised if the entire complex remained in "range-bound trading for the foreseeable future until...and unless something comes along to upset the balance."

Looking at support lines, Levine first sees $7.250, followed by $7.025, then $6.850, with $6.650 below that. As for resistance, the broker said $7.475 is followed by $7.925 and $8.450. Beyond that, he sees $9.150 and $9.750 as potential resistance areas.

Technicians have mixed view on which way the market is headed. "Looking at the December chart, it suggests that the market still has a fifth wave down, which could easily take it to the old lows if not new lows," said a Washington, DC-based broker. The fifth wave refers to the fifth and final wave of a conventional Elliott Wave pattern formed on, in this case, the December natural gas futures chart. A typical five wave pattern (downward) assumes three waves, one, three and five in the dominant direction punctuated with waves two and four in the opposite direction, upwards in this case.

Wave counts can be subjective, but taking the December futures high of $11.770 posted April 20, a case can be made for a wave one ending at $9.00 on July 18, wave three on Sept. 28 at $7.00, and a wave five working still lower from the wave four advance ending at $8.45 on Oct. 27.

"On a short-term basis the market could continue to fall to $6.80 or below, and the big question is whether the market can continue into the $4 area, but the longer term charts don't suggest that. Even a $5 handle for the December contract is a bit of a stretch until weather gets further defined." the broker said.

However, another broker said last week that he sees the Elliot Wave theory working in the opposite direction, with waves one, three and five higher and waves two and four lower (see Daily GPI, Oct. 30). In an interview last Friday, the broker said he is still bullish natural gas futures. "Using Elliot Wave theory, I would still call this a fourth wave correction in a bull move with the fifth wave higher still to come," he said. "If we had crossed the $6.820 level, then we would have something completely different going on here. All in all, I would still be bullish here for the next seven to 10 days."

Weather forecasts for later this week don't suggest immediate help for the bearish case. The National Weather Service (NWS) forecasts slightly above-normal accumulations of heating degree days (HDD) for key energy markets. For the week ended Nov. 4, 130 HDD, or six above normal, are forecast for New York, New Jersey and Pennsylvania, and for Ohio, Indiana, Illinois, Michigan and Wisconsin, 149 HDD, or 12 above normal are predicted.

"In the short-term, the market will be living and dying on weather forecasts," the DC-based broker said. He also said that there were two divergent long-term winter forecasts in play, the NWS El Nino driven forecast calling for a mild winter throughout much of the Midwest and East, and the AccuWeather forecast of prominent meteorologist Joe Bastardi calling for a limited El Nino effect, and cool temperatures along the eastern seaboard. However, the broker said nearer term forecasts should be highlighted right now.

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