A fundamental look at Nat Gas Last week Nat Gas futures were hammered again as the US Winter had not arrived in most regions of the Country, Chicago and NY the exceptions. Nat Gas futures declined by 12.25% or $0.327/mmbtu after falling by 12.8% the prior week. Nat Gas made efforts several times last week trying to put together a Short covering rally. Unfortunately for the bottom pickers it failed and came nowhere near approaching the $2.72/mmbtu level breached about 2 wks ago. In the end Nat Gas made another new intra-day life of contract low with the Shorts headed home for the weekend comfortable with their positions. Looking at the situation all of the normal price drivers for the Nat Gas complex remain biased to the Bearish side with the sole exception of the fact that the market is starting to get a bit oversold and may be due for a Short covering rally at some point in here. Nat Gas futures made yet another new life of contract low last week with a potential for prices falling the low $2′s before too long, imagine $2 NG...T. Boone Pickins is calling for $1 NG.
In spite of the fact that the market is still oversold, as least measured by the commonly followed RSI indicator which is around the low 20′s for the 10-Day RSI there is no indication that the market is setting up for a strong Short covering rally.
Normally the market is considered oversold when the indicator drops below the 20 mark. So, it is not there yet, but as with most indicators none of them are perfect nor always correct. But, they are a guide to incorporate in ones overall trading ideas.
When markets are in a strong trend, as Nat Gas is now, oversold indicators like the RSI can remain in an oversold state for a long period of time.
That said a Short covering rally will occur when it is least expected. The magnitude of the rally will be dependent on what triggers it. If it is a result of very cold weather projected for an extended period of time the rally could be very Strong and likely send prices back to a test of the $3.05/mmbtu resistance level. If is only due to sellers drying up then the rally will be modest and likely test the $2.72/mmbtu level. But it is time to get on the Short covering rally watch and look for the Key reversal. Currently prices are now trading below the Y 2009 lows with not much support until the market hits around $1.905/mmbtu.
Predicting when Short covering rallies will occur and what the magnitude is not a precise exercise . The bottom pickers have been predicting and actually setting up positions since the price was in the low $3′s looking for a rally to hit, they are still looking.
For the moment the market remains in a downtrend and will remain in that mode until proven otherwise. Wait for the market to signal that it is turning.
Baker Hughes Rotary Rig Count US Oil and Gas for the week ending January 20, 2012
January 20, 2012
%change from previous month1
%change from previous year2
Paul A. Ebeling, Jnr.
Paul A. Ebeling, Jnr
Paul A. Ebeling, Jnr. writes and publishes The Red Roadmaster's Technical Report on the US Major Market Indices, a weekly, highly-regarded financial market letter, read by opinion makers, business leaders and organizations around the world.
Paul A. Ebeling, Jnr has studied the global financial and stock markets since 1984, following a successful business career that included investment banking, and market and business analysis. He is a specialist in equities/commodities, and an accomplished chart reader who advises technicians with regard to Major Indices Resistance/Support Levels. www.livetradingnews.com