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Bearish risks remain prominent in natural gas despite rally

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Essential Energy Insights - September 17, 2020

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Bearish risks remain prominent in natural gas despite rally

Naturalgas prices have chopped around, showing some considerable strength in the last twomonths of trading, while rallies have been answered by downside reversals signaledby stochastics that reflect accelerating negative momentum.

Naturalgas prices have had a nice run higher for nearly two months, and through the April25 high at $2.176/MMBtu, have rallied around 35% off the March 4 low at $1.611/MMBtu.

A drivingfactor behind the strength has come from the rollover of the May futures into thelead contract on the continuation chart, where it broke out above key resistancefrom the 50-day moving average March 30. On April 19, the market took out additionalresistance from the 100-day moving average, which will offer support near $2.00/MMBtuon April 26.

The strengtheningchart action has been reinforced by data from the U.S. Commodity Futures TradingCommission's "Commitments of Traders" report, which has revealed a in the netshort position in recent months.

The netshort has gone from a record 233,984 contracts in the week ended Nov. 3, 2015, to57,511 contracts in the week ended April 19.

Lookingat stochastics, "Momentum on natural gas prices remains positive as the MACD(moving average convergence divergence) index prints in the black with an upwardsloping trajectory which points to higher prices," FX Empire analyst DavidBecker said in an April 26 report.

But afteradding to the April 22 close at $2.140/MMBtu, to post the intraday high at $2.176/MMBtuon Monday, April 25, May natural gas futures have since failed to gain additionaltraction, shedding more than Friday's 7.2-cent gains to an April 25 settle down7.7 cents lower at $2.063/MMBtu.

"Thenatural gas markets initially tried to continue to rally during the course of theday on Monday, but turned right back around to form a very negative candle,"FX Empire analyst Christopher Lewis said. "With this being the case, it appearsthat natural gas will continue to struggle to hang onto gains, and eventually couldvery well break down."

Despitethe positive signal from the MACD, Becker said that there is a negative signal fromthe downward movement in the RSI, or relative strength index, combined with lowerprice action. This reflects accelerating negative momentum, which also points tolower prices, Becker said.

Risingstochastics at overbought levels warrant some caution for bulls, Zaner analystswarned in an April 26 note. "A positive signal for trend short-term was givenon a closer over the 9-bar moving average. The daily closing price reversal downis a negative indicator for prices," Zaner analysts said.

Further,while the CFTC data indicate that the bulls have been piling into natural gas, openinterest data provides some cautionary notes.

Sincepeaking on April 18, open interest has fallen 50,648 contracts through April 22while prices increased 20 cents. Such strength on declining open interest tendsto indicate that short covering is taking place, which can be bearish in the longrun.

A bearishengulfing day candlestick reversal pattern made on April 25 on the June futureschart adds to potential pressure from open interest data. The reversal was madeat the top of a bearish flag continuation pattern, which is drawn off the March7 and April 18 lows and the March 18 high.

WithMay natural gas futures set to expire at the close of business Wednesday, April27, June natural gas prices are seeing more downside follow through April 26 aftera bearish outside day reversal from a new high for the move, Zaner said.

"Thenegative turn lower and close back below the $2.20 level is a concern to the bullcamp and favors a larger corrective rebalancing effort of the last week's advance."

"Bearishreversal action in June natural gas suggests a larger corrective setback of lastweek's rally is in the cards. A 50% retracement target comes in at $2.138, withswing low support all the way back at $1.972. Resistance comes in at $2.307,"Zaner said.

Market prices and included industrydata are current as of the time of publication and are subject to change. For moredetailed market data, including powerand naturalgas index prices, as well as forwardsand futures,visit our Commodities Pages.