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Choppy trade in natural gas may disguise underlying bearish trend

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Essential Energy Insights - September 17, 2020

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Choppy trade in natural gas may disguise underlying bearish trend

Thenatural gas market has experienced a sideways-to-higher trend over the past twomonths, but technical action implies that more weakness may be in store as abearish flag continuation pattern will oppose support from longer-term movingaverages.

Aftera sharp rally in mid-April pushed June natural gas futures to the highest levelin more than two months, a near equally as sharp selloff has forced the marketback to the downside. While there was evidence that the mid-April rally hadbeen the result of new long positions entering the , the trend shifted to shortcovering in the week ended April 26, which could become a negative for prices.

Thelatest data on so-called "smart money" traders showed that noncommercial traders subtracted 16,879contracts from their net short position, but did so by liquidating 39,066 shortpositions while only 22,187 longs were cut.

Shortcovering is also indicated by the decline in open interest, which has fallen59,198 contracts between a bottom in prices made on April 18 and the close onApril 29. Prices advanced 23.8 cents between those two dates, but thecontraction in open interest signals that traders have been exiting during therally instead of joining it.

Thedowntrend has also been weighed by the bearish engulfing day reversal patternmade on April 25 on the June futures chart. The reversal was made as the markettested and generally held at the top of a bearish flag continuation patterndrawn off the March 7 and April 18 lows and the March 18 high. The bottom ofthe pattern will offer support near $2.03/MMBtu

Junenatural gas turned higher to close out the week to April 29 but returned thosegains and then some in Monday, May 2, trade as the contract settled 13.6 centslower at $2.042/MMBtu.

"Thenatural gas markets initially tried to rally during the course of the day onMonday but then turned right back around to fall and continue the consolidationthat we've seen recently," FX Empire analyst Christopher Lewis said.

Gainswere attempted again early Tuesday, May 3, as participants, "try tostabilize yesterday's drive into the lowest level since April 18," Zaneranalysts said.

Thecontact closed the May 3 session 4.4 cents higher at $2.086/MMBtu.

Despitethe efforts higher, the bear camp holds the near-term advantage in June naturalgas, Zaner said.

EnergyManagement Institute principal Dominick Chirichella concurred, seeing a spotcontract that has lost its upside momentum and is apparently setting up for apossible downside test of the lower range support over the next few sessions.

The$2.00/MMBtu level has remained supportive, but, "If the market can breakdown below there it suggests that we are starting to see quite a bit of bearishpressure, and therefore could send this market to the $1.90 level after that,"Lewis said.

Theclose under the 60-day moving average indicates the longer-term trend could beturning down, Zaner said. "Momentum studies trending lower at themid-range could accelerate a price break if support levels are broken. Themarket back below the 18-day moving average suggests the intermediate-termtrend could be turning down."

Thelong-term trend is decidedly bearish, according to the analysts.

"Weare very bearish of this market longer-term, and at this point in time have nointerest in buying and believe that eventually the downward momentum will pickback up," Lewis said.

Thenext downside objective is $1.951/MMBtu.

Oppositionto the bearish factors will come from the 50-day moving average on the Junefutures chart near $2.044/MMBtu and from the 100-day moving average on thecontinuation chart about 5 cents below it at $1.994/MMBtu.

Thenext area of resistance is around $2.108/MMBtu and $2.184/MMBtu, Zaner said.

Market prices and includedindustry data are current as of the time of publication and are subject tochange. For more detailed market data, including powerand naturalgas index prices, as well as forwardsand futures,visit our Commodities Pages.