Despite revised weather forecasts calling for a warm-up east of the Mississippi, natural gas futures shuffled higher Monday as traders continued to hedge for the possibility of a technical short-covering rally. The buying was concentrated in the morning hours and by 12:20 p.m. EST the February contract had already reached its peak for the day. However, only light selling was seen throughout the afternoon and as a result, the February contract managed to hold onto some of its morning advances. It finished at $2.25, up 4.6 for the session, but 7.5 cents off its high trade.
Traders were given their choice yesterday of whether to sell the market on bearish weather forecasts or buy the market on bullish Commitments of Traders data released late Friday. According to the latest six- to 10-day weather forecast released by the National Weather Service, above-normal temperatures are expected over a wide area of the Eastern U.S. beginning this weekend through at least the middle of next week. That forecast sharply contrasts with reports late last week calling for below-normal temperatures later this week across much of the country.
Given the revised forecasts, many traders polled by NGI Monday were surprised by the market’s ability to resist a downturn. “Storage and weather are in agreement now — they are both bearish,” a Houston risk manager said. “I can’t understand how this market continues to defy gravity.”
But even the latest weather forecasts will sometimes take a back seat to compelling technical data. According to the latest Commitments of Traders data released Friday afternoon by the Commodity Futures Trading Commission, non-commercial traders increased their net short positions to a record 47,104 positions as of last Tuesday. Because they have, over the course of the last five years, predominantly sold the market as it fell and bought the market as it soared, this speculative segment of the market has earned the reputation as a barometer of price direction. Between Dec. 28 and Jan. 8, they accumulated 14,001 additional net short positions, and during that time the prompt month lost 49.3 cents and the 12-month strip lost 36.1 cents.
Although admitting that the technical factors suggest the possibility for a rally, Cynthia Kase of New Mexico-based Kase and Company, believes any push to higher levels will be short-lived. “There are a number of signs that indicate a technical rally is expected, but we are skeptical as to the market’s ability to follow through,” she wrote in a note to her customers Friday. “Even if a rally does take place, odds favor prices holding this calendar month’s highs.” In order for the rally to really get Kase’s attention, it would have to clear the $2.50 mark in all three front contracts.
On the downside, she looks for last week’s low at $2.14 to give way to a move down to $2.07, basis the February contract. Lower still, the $2.00 level has added significance (in addition to being an even dollar target) because it now stands as an important Elliot Wave projection.
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