January natural gas tumbled 6.3 cents Monday, as traders look for some semblance of price support amid an unfavorable technical and fundamental setting. At the close January had fallen 6.3 cents to $3.254 and February had retreated 5.9 cents to $3.294. January crude oil dropped $1.64 to $97.77/bbl.
“Today’s value area is $3.246 to$3.268 and on the Market Profile the market is kind of free-falling,” said Tom Saal, senior vice president at INTL Hencorp Futures in Miami. The market opened lower, didn’t make a new low [from overnight], but I would have liked to have seen it settle higher, ideally higher than $3.257, but that didn’t happen”
Value areas are a key component of Market Profile methodology, and as a general rule the market will test the prior day’s value area, typically the next day.
“If January had settled $3.256 or higher it would have been better, because it would have been higher than the first hour. Today was a [Market Profile] ordinary day. It was a failure to rally and hold,” Saal said.
“The next value area test is Friday’s at $3.314 to $3.358, and all the untested value areas are higher; it’s kind of like the funds come in and sell, push it down, sell, maybe buy it back a little bit. They keep leaning on the market and will keep doing it until someone starts buying it. Once prices start rising, we should get a nice little rally since the funds will be covering.”
Before the latest sharp drop in prices, government figures showed interest in the long side of the market as being far greater than pursuing additional sales. The Commodity Futures Trading Commission in its Commitments of Traders Report for Dec. 6 indicated that directional traders bought options and futures at more than a 2:1 ratio to sales.
At the IntercontinentalExchange managed money purchased long futures and options (2,500 MMBtu per contract), and open interest rose by 90,479 to 381,869, and short contracts increased by 68,804 to 243,259. At the New York Mercantile Exchange long futures and options (10,000 MMBtu per contract) rose by 6,072 to 141,153 and short holdings declined by 5,715 to 263,871. When adjusted for contract size, long positions at both exchanges rose by 28,692, and short holdings increased by 11,486.
Despite the greater interest in the long side of the market, for the five trading days ended Dec. 6 January futures fell 14.6 cents to $3.487.
Now that natural gas has entered a new price regime, technical analysts are looking for a spot from which the market might be able to at least stabilize if not put together some sort of reversal higher. “The rally from $3.285 [December contract low] stopped right where a minor bear market correction should have peaked out,” said Walter Zimmermann, vice president of United-ICAP. “The decline from the $3.689 high [Dec. 1] already fell too far to be a bull market correction.”
Zimmermann’s calculations, based on retracement analysis, show support at $3.210 as 0.7862 of the longer-term advance, which took prices from $2.409 up to $6.126 in late 2010 and also at $2.970 as 0.852 of that same run higher.
Others note that the market is deeply oversold but caution that there may still be room to work lower. “Prices have fallen so far, so fast that they are below important support much earlier than anyone would have expected,” said Peter Beutel, publisher of Daily Oil Hedger prior to the market’s open. “Prices have challenged lower levels much sooner than expected, but they have also reached levels that have been much more oversold than they otherwise would have been at existing numbers on the price charts. We fully expect prices to keep working lower until they encounter support and oversold pressures that are strong enough to give prices a real psychological boost.
“Prices have started to bounce more violently as they have gotten lower, and that is a factor begot by greater oversold factors as we drop to new lows, which seems to happen every other day as prices get worse. As the market continues to worsen, longer-term buying interest is only going to increase, and ultimately it should fund itself after any major turn back up is able to get itself jump-started. It is almost certainly going to have to start with the weather. Any sudden or extended cold snap will have the potential to catch shorts leaning the wrong way.” he said in a morning report to clients.
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