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Natural gas technicals become constructive as strong resistance looms

Thetechnical condition in natural gas improved at the start of the final tradingweek in March as the market retested levels that were held as resistance just aweek earlier.

Tradein mid-March rallied up to test resistance from the 40-day moving average andthe Fibonacci 38% retracement of the Jan. 8 through March 4 downtrend near$1.95/MMBtu. The market peaked on March 18 at $1.957/MMBtu, which indicatedthat a fall back toward the bottom of the Fibonacci pattern at $1.611/MMBtu waspossible.

Thedownside reaction lasted only a few days and took the market toward only$1.766/MMBtu before a rebound ensued. The lack of significant downsidefollow-through suggests that an advance above $1.95/MMBtu is now possible; amove that is starting to take place in the new front-month May futures.

Dailystochastics are bullish with the market now above the 40-day moving average,suggesting the possible longer-term trend has turned up, analysts said.

"Thecrossover up in the daily stochastics is a bullish signal," Zaner analystssaid. "Momentum studies are rising from mid-range, which could acceleratea move higher if resistance levels are penetrated. A positive signal for trendshort-term was given on a close over the 9-bar moving average. With the closehigher than the pivot swing number, the market is in a slightly bullishposture."

Theupward trend began in early March with a bear trap reversal pattern formed by thebreakdown on March 3 below support from the low on Dec. 18, 2015, at$1.684/MMBtu. The market did not show any downside follow-through and movedback above that level as resistance within a few days.

Thebottom of the reversal was made at $1.611/MMBtu on March 4, which also helpedthe bullish case because it represented a hold of support from the August 1998low at $1.610/MMBtu.

Analystshowever remain guarded about the long-term sustainability of the currentup-move with strong resistance around $2/MMBtu and a fundamental backdrop thatremains exceedingly bearish.

"Thenatural gas markets had an explosive day to the upside [Tuesday, March 29],gaining almost 7%. However, this is a market that is approaching a very massiveresistance barrier in the form of $2, so more than likely we will see a bit ofa struggle just above," FX Empire analyst Christopher Lewis said.

Thefresh front-month May natural gas futures contract traded as high as$2.015/MMBtu early Wednesday, March 30, and was last eyed 0.8 cent higher at$1.989/MMBtu.

"Weare waiting to see whether or not we get an exhaustive candle to start sellingagain, and we will certainly do so and not hesitate due to the fact that we arein such a massive downtrend. With that, we like selling natural gas once wefinally get the signal," Lewis said.

Thefront-month May contract will find resistance from the March 18 high, which wasmade at $2.032/MMBtu.

Somepressure is also possible from the latest data on commitments of traders fromthe U.S. Commodity Futures Trading Commission, which showed short covering hasbeen at play.

Thenet short position bymanaged money traders was reduced by 33,064 contracts to 122,800, with 32,225 shortpositions cut and 839 long positions added. Noncommercial traders also leanedtoward short covering, with 33,406 shorts eliminated and only 9,901 longpositions cut.

Whilethe market recovered since reaching a low on March 28 at $1.837/MMBtu, therecent break from $2.032/MMBtu on March 18 drove prices down for five daysbefore a change in the weather forecast encouraged short-sellers to bookprofits and cover their positions, FX Empire analyst James Hyerczyk said.

"Thefast rally at this time of year on a weather story suggests that a shortsqueeze may be taking place. The supply/demand fundamentals remain weak so thisrally is not expected to last," Hyerczyk said. "Chart watchers haveidentified $2.006 to $2.071 as a key resistance area. Last week's top at $2.032was formed inside this zone. A trade through $2.032 will change the main trendto up on the daily chart and indicate the short-covering is stronger thanexpected."

Zanersees the near-term upside objective at $2.043/MMBtu. The next area ofresistance is around $2.021/MMBtu and $2.043/MMBtu, while first support hits at$1.945/MMBtu and below there at $1.90/MMBtu.

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.