Ending a seven-session price advance, natural gas futures dropped lower at the opening bell Monday as traders alleviated overbought conditions and cashed in on a portion of recent gains. After that initial wave of weakness, however, the market steadied itself, giving buyers the opportunity to chip away at the deficit for the remainder of the day.
November finished in negative territory at $5.547, down 10.5 cents for the session, but well above its early low at $5.39. At 94,004, estimated volume in the gas pit was heavy.
With few fundamental factors on which to pin the early price slide, market watchers were quick to turn to technicals to explain the market’s behavior. Overbought conditions was the recurring theme cited Monday with traders pointing to the market’s meteoric rise of more than a dollar in just more than a week. “[In the] short term, [this market] is overbought,” warned Ed Kennedy of Commercial Brokerage Corp. in an early note to clients Monday. “Look for a sell-off [Monday] down to downtrend support,” wrote the Miami-based broker.
As it turns out, he was right and November futures wasted little time funneling down to trendline support drawn off the 120 minute bar chart. What surprised many market-watchers however, is how well the market bounced off that $5.40 area to finish nearly 15 cents higher.
Because the market rebounded so spryly, traders are mixed on the next price leg. While some suggest that Monday’s sell-off alleviated the overbought conditions and cleansed the market’s of some of its weak length, others look for more softness this week. “While probabilities are on the side of some additional rally over the very short-term, the longer-term picture warns that gas is becoming vulnerable to a correction to retrace some percentage of the strong rally from the October low,” said futures technician Craig Coberly of GSC in Atlanta. “Given the large magnitude of this rally, even an unusually small percentage retracement results in a significant price move.”
Specifically, Coberly points to Fibonacci retracements of the recent rally that could land the market down to $5.23 (50%) or $5.00 (62.8%).
Looking ahead, fundamental picture is also mixed this week as traders will grapple with the likelihood of another large storage report Thursday against the backdrop of cooler weather forecasts. Kyle Cooper of Citigroup remains bearish on storage and looks for a 82-92 Bcf refill to easily eclipse last year’s comparable 48 Bcf build as well as the five-year average injection of 51 Bcf. “Inventories are easily on track to exceed 3,050 Bcf and may easily hit 3,100 Bcf,” he said.
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