Within a massive market downtrend, rallies in natural gas futures will only provide fresh selling opportunities with $3/MMBtu exceedingly resistive, according to analysts.
"The trend is down and expected to continue over the near-term as sellers continue to probe the downside for support. In the meantime, we're still vulnerable to periodic short-covering rallies because of oversold conditions, but these are likely to be shorting opportunities," FX Empire analyst James Hyerczyk said.
Natural gas markets rallied Oct. 10 and extended gains Wednesday, Oct. 11, with November reaching $2.962/MMBtu, but struggling to close in on the key resistance $3/MMBtu mark.
Traders remain cautious despite recent gains, "It's a little too early to call for a seasonal low. Firstly, I'd like to see a solid support base built before I'll trust any rally," Hyerczyk said.
"This is an area that's been both supportive and resistive on short-term charts, and quite frankly with the massive downtrend that we continue to see in this market and of course the fact that every time that we rally we start seeing sellers has me believing that buying is all but impossible, and that more than likely we can continue the same attitude that we have seen in this market previously, that every time we rally and show the first signs of exhaustion, it's time to start selling," FX Empire analyst Christopher Lewis said.
Sellers continue to run the market and a break down below $2.75/MMBtu is seen as likely, with the $2.50/MMBtu level expected to be much more difficult to clear.
"Given enough time, it's likely that the market will find itself continually range bound between the $2.75 level and the $3.10 level. This is a market that continues to offer plenty of opportunities, if you are patient enough to take advantage of them," Lewis said.
Resistance is seen near the 10-day moving average at $2.935/MMBtu, while support is seen near the weekly lows at $2.827/MMBtu.
Momentum remains negative but it is decelerating as the moving average convergence divergence index prints in the red, but the trajectory of the moving average convergence divergence histogram is positive and trending higher, which reflects consolidation.
The relative strength index rebounded slightly, bouncing off support, reflecting some positive momentum, FX Empire analyst David Becker said. "The current reading of 41 is on the lower end of the neutral range, which reflects some consolidation," he said in an early Oct. 11 note.
Looking at the December contract, which finished Oct. 10 at $3.071/MMBtu, up 5.3 cents, or 1.76%, and continued higher Oct. 11 to a $3.133/MMBtu high, analysts see the move as fueled by oversold conditions and see a possible move into the $3.090/MMBtu to $3.108/MMBtu range if the rally continues.
"Overcoming this area will be a sign of strength with the next key levels coming in at $3.167/MMBtu, $3.183/MMBtu and $3.223/MMBtu," Hyerczyk said.
As the contract continued higher into midweek trade, bears are being put on notice, Zaner analysts said in a note.
"With almost two thirds of speculative length from money managers having been liquidated over the last two weeks, the market should have limited selling interest above," Zaner said.
Data from the "Commitments of Traders" report from the U.S. Commodity Futures Trading Commission published Oct. 3 showed that managed money accounts added 39,814 to their net long position to reach 560,645 contracts in the week since Sept 26. Managed money accounts added 4,665 net short positions to reach 17,528.
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