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Multiple tests of key support levels in natural gas suggest weakness in store

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Multiple tests of key support levels in natural gas suggest weakness in store

Natural gas futures are testing key support between $3.11/MMBtu and $3.17/MMBtu for a third time in the past month, which suggests that a further breakdown may be setting up to take place over the next week or two.

March natural gas futures broke past key support levels, sinking into a new lower technical trading range on Tuesday, Jan. 31, and with little fundamental support behind it, the contract is expected to continue lower, with rallies providing only fresh selling opportunities.

Front-month natural gas futures broke past $3.25/MMBtu support to trade as low as $3.117/MMBtu on Jan. 31 and extended the downside overnight to a $3.113/MMBtu low, before moving back higher Wednesday, Feb. 1. The contract ended the Feb. 1 session 5.1 cents higher at $3.168/MMBtu.

"From a technical perspective, the [March] Nymex contract ended Tuesday's trading session in another new lower technical trading range and at the lower end of its current trading range," Energy Management Institute principal Dominick Chirichella said.

Pressure has been in place for more than a month, when trade on Dec. 28, 2016, broke out above the rising trendline drawn off the Oct. 13, 2016, and Dec. 9, 2016, highs but failed to the downside on the next day. The weakness eventually forced prices below the 100-day moving average on the continuation chart on Jan. 31.

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Despite the attempt to rally in Feb. 1 trade, technical analysts expect the upside to be limited, and instead see an inevitable break to $3/MMBtu, which should prove resistant, but with additional losses likely.

A breakdown below the $3.10/MMBtu level should send the market to the $3.00/MMBtu level underneath, which is a large, round, psychological barrier, FX Empire analyst Christopher Lewis said. "The $3 level will be strong, but I think given enough time we may even be able to break down below there."

Analysts cited oversupply and weak weather-related demand particularly in the Northeast as reasons behind the weakness. These factors are expected to continue to work against the value of natural gas, Lewis said.

From a technical perspective, weakness can also be anticipated by trends in open interest, which formed a small trough on Jan. 24. Between that date and Jan. 30, open interest increased 22,556 contracts while prices fell 4.7 cents. Builds in open interest such as these typically give confirmation to a price trend.

There is a price gap on the daily chart from $3.536/MMBtu to $3.649/MMBtu that occurred from the close of business on Dec. 30, 2016, to the open on Jan. 3, market analyst Andrew Hecht said in a Jan. 30 note.

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The price gap on the weekly natural gas futures chart is from $3.568/MMBtu to $3.664/MMBtu, he said.

"The last gap on the natural gas chart dates back to December 2014 and while it was filled it took almost two years, that void was filled by price action in November 2016," Hecht said.

A price gap is often a target for speculators. Hecht said it is still possible that price action could erase the void over coming weeks.

Any rallies at this point, however, should be selling opportunities on signs of exhaustion and of course the gap above the $3.30/MMBtu level should be a significant barrier for buyers, Lewis said.

Support for natural gas is seen near the January lows at $3.11/MMBtu, which is where prices bounced, FX Empire analyst David Becker said. Resistance is seen near the 10-day moving average at $3.29/MMBtu.

The bounce near $3.11/MMBtu represented a hold at support from the Jan. 9 low in March futures. Slightly above that level is support from the 62% retracement of the Nov. 9, 2016, through Dec. 28, 2016, uptrend at $3.17/MMBtu. While the retracement has been broken twice on a closing basis, the breaks have been by only a few cents, which could leave the support level intact.

Natural gas traded in a 47-cent range during January from $3.568/MMBtu to $3.098/MMBtu.

Momentum has turned negative as the Moving Average Convergence/Divergence, or MACD, index generated a sell signal. This occurs as the spread, or the 12-day moving average minus the 26-day moving average, crosses below the nine-day moving average of the spread. The index moved from positive to negative territory confirming the sell signal.

If the contract does not hold the current support level, the price could then easily decline to around the $2.90/MMBtu, especially if the weather remains warm, Chirichella said.

Market prices and included industry data are current as of the time of publication and are subject to change. For more detailed market data, including power, natural gas and coal index prices, as well as forwards and futures, visit our Commodities pages.