What a difference a week can make when you are dealing with thevolatility of natural gas futures. As recently as last Friday whenprices carved out a $4.98 low, it appeared that bulls had turned intheir horns and donned their bear coats for the winter. And whynot? Storage injections were picking up, demand was light andtechnicals 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 yesterdayto set a new all-time high as traders lifted natural gas prices insympathy with spiking crude oil. Adding to Wednesday’s 37.4-centincrease, November finished 12.2 cents or 2.2% stronger at $5.63yesterday. By comparison, November crude rocketed $2.81 or 8.5%higher to close at $3.606 amid heightened fears over an impendingMiddle East crisis.
Sometimes called a correlation of convenience because it onlytends to manifest itself when it is in the same direction of theoverall trend, the crude oil-natural gas price relationship is ashaky one. Yesterday morning, while crude was already a dollarhigher in overseas markets, natural had barely budged and,following a little strength in the overnight session, opened lessthan two pennies above Wednesday’s $5.508 November close. In fact,Access and OTC markets before the open were so quiet yesterday thatthey resembled corn futures, said George Leide of New York-basedRafferty Energy Group.
However, after realizing what was going on in the nearby crudeand heating oil pits, natural gas bulls were fast learnersThursday. “Crude and the rest of the petroleum complex had alreadytaken the next leg up.. Traders were looking around saying we’vegot to buy something and natural gas was it,” Leide said.
Another astute market watcher agreed and pointed to the bullishAPI 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 rallyin natural. What we saw Wednesday was a delayed reaction on thepart 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 typeof market to trade because of the lack of reference points at thisprice level. That said, he is advising his clients to look for aseries of lower lows and lower highs to give clues for when toenter the market on the short side. “You’ve got to be nimble uphere. The only safe way to trade it is look for weakening momentumand put your stops in tight. Getting egg on your face is bad nomatter what time of day.”
If the market is able to move lower, he looks for support firstat $5.59 and then again at Thursday’s low of $5.52. Below thatlevel, there could be additional stickiness at the $5.395-400 chartgap that was created by the move lower on Sept. 28, he said.
Alternatively, the aforementioned market watcher targetsresistance at $5.89 today, which corresponds with the up-trend linethat supported prices from July 26 through September 27. That linehas the slope of 4 cents a day. And while does not rule out a testof resistance up there today, he believes pre-weekend profit takingmight trim this week’s gains Friday.
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