Natural gas futures closed to a mixed finish Tuesday, and much of the trading was bookkeeping as index funds rolled long positions from September to more distant months. The September contract eased less than a penny to $6.201, and the October contract gained 1.7 cents to $6.395.
“The funds were selling September and moving their length to November. Anything in the front of the curve does not look to have great value, and traders are putting their money on an early winter snap,” said a New York floor trader.
Index funds are pools of capital that attempt to emulate changes in indices such as the Consumer Price Index (CPI), which tracks inflation, by purchasing futures contracts such as for natural gas and other commodities. If done correctly the value of a fund will equal changes in the index and act as a vehicle to minimize inflation’s impact on other investments.
Market technicians are trying to ascertain if natural gas is positioning itself for a move higher. “The question is whether natural gas is attempting a little bit of a rally which would be the fourth wave of an overall five-wave Elliott Wave pattern down,” said a Washington, DC, broker. He said the third wave (down) ended July 25 when the August futures contract posted a low of $5.780, and “now it looks like we are in a fourth wave up.”
Modeling markets based on a comparison of current price behavior with predetermined patterns is a common way traders predict market behavior. The Elliott Wave analysis used by the broker, models prices on a five-wave pattern: three waves taking place in the direction of the major trend and two corrective waves against the trend. It is one of a broad family of analytical techniques such as the Dow theory, Retracement, Fibonacci and others that rely on the matching of observed price trends with predetermined cycles, which adherents claim can be used for market timing and price projection.
“Some of our momentum indicators have turned slightly bullish and the fifth wave lower would take place after the current fourth wave higher is finished. I’m not so sure there is a cataclysmic move lower beyond the low of July 25, and we are targeting a near-term rise [4th wave] to the $6.70 area,” he said.
He added “the big question” was whether one of these Atlantic tropical waves or storms systems actually turns into something important, for “there is so much open interest covered by the large speculators that could be a significant advance if they just cover 30% of their short positions. If they cover, they could take the 4th wave up to $7.50,” he said.
For the moment the tropics are quiet. The National Hurricane Center is not following any weather systems at present and did not expect tropical cyclone development in the Atlantic, Caribbean, and Gulf of Mexico in the next 48 hours.
Weather bulls, however, still have abundant heat in key eastern and Midwest energy markets to aid their cause. The National Weather Service reports for the week ended August 11 above normal accumulations of cooling degree days (CDD). New York, New Jersey and Pennsylvania are forecast to swelter through 69 CDD, or 15 more than normal. The Midwest states of Ohio, Indiana, Michigan, Illinois and Wisconsin are expected to endure 97 CDD, or 44 more than normal.
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