In a stunning show of bearishness that had even the most seasoned traders shaking their heads, natural gas futures continued lower Friday as sellers demoted prices to new 13-month lows. A gap lower opening set the tone of the session, and bulls were never able to recover. The August contract spent most of the day trading near its $3.055 low, closing 18.4 cents weaker at $3.096.
Heading into the session Friday, many traders were poised for a rebound–and for good reason. Since notching a $4.53 high on June 12, the August contract has tumbled lower on 11 of 13 days for a net loss of $1.43. While it is generally agreed that markets tend to move more fluidly downward than they do upward, it is rare for a market to see such a protracted period of falling prices. For example, from April 23 to May 9, the prompt month tumbled nearly a dollar in a 12-session free-fall, only to rebound nearly 50 cents during the next four days. The market proceeded to nearly repeat that feat by dropping another dollar in nine-session slide from May 16 to May 29, before correcting–this time to the tune of 70 cents.
So if markets rarely fall for more than 2 weeks straight, why is it that the futures market did not rebound late last week? For Cynthia Kase of New Mexico-based Kase and Company, the answer lies in the fact there is essentially nothing for bulls to hang their hat on. “We gapped lower on the open [Friday] and spent most of the session near the lows for the day. Technically, that is a very negative set-up,” she warned.
Although she bases her price targets strictly on technicals, she admits that if this market is to turn around, it will have to come from some fundamental impetus. However, with mild weather, no hurricanes in sight and “a well-contangoed” market giving traders even more incentive to inject gas into the ground, that scenario does not look probable. That being said, Kase uses Fibonacci extension percentages to determine how far a trending market is likely to move away from, its previous low price.
The percentages are based on the thirteenth century work of Leonardo Fibonacci, who rediscovered that in the continuous number sequence (beginning with the number 1) A+B=C; B+C=D, C+D=E,…. (1,2,3,5,8,13,21,34,55,….); the quotient of any number divided by the next highest consecutive number approaches 0.618.
By analyzing as many as 21 different price ranges that have described the August contract over the past several months, Kase has observed a confluence of nine Fibonacci extension levels in the $2.50-57 area. It is for this reason that she targets that area as not only a downside objective, but also as a very good level of support for this market.
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