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Short-covering rallies in natural gas seen opening door to fresh selling

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Essential Energy Insights - September 17, 2020

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Short-covering rallies in natural gas seen opening door to fresh selling

The natural gas market's bias appears to be to the downside as oversold conditions leave the market susceptible to short-covering rallies but with any gains likely giving way to profit taking, technical analysts said.

In Tuesday, Oct. 3, trade, sellers probed the short side, taking out the last main bottom at $2.886/MMBtu before hitting its low for the session at $2.880/MMBtu.

Momentum on natural gas is negative as the moving average convergence divergence, or MACD, index recently generated a crossover sell signal. This occurs as the spread between the 12-day moving average and the 26-day moving average crosses below the nine-day moving average of the spread. The MACD histogram is printing in the red with a downward sloping trajectory, which points to lower prices for natural gas.

"Momentum studies are declining, but have fallen to oversold levels. The market's short-term trend is negative as the close remains below the 9-day moving average," Zaner analysts said following the Oct. 3 settle.

But analysts are stressing caution. Acknowledging that a new short looks tempting, FX Empire analyst James Hyerczyk suggests a move, "Only if you have a fast exit if wrong because this market could come roaring back because of oversold conditions."

In fact, after a string of losses, November natural gas worked its way higher Wednesday, Oct. 4, but resistance held near the 10-day moving average at $3.00/MMBtu.

The Oct. 4 gains are expected to open the door to fresh selling opportunities.

"I think that rallies should be selling opportunities, as the $3 level offers a massive amount of resistance," FX Empire analyst Christopher Lewis said.

Still, Hyerczyk said, "This is a tricky area for traders because new short-sellers don't want to get caught in a bear trap by selling weakness. Given the limited risk, it may even be attractive to buyers."

The next downside targets are seen at $2.867/MMBtu, followed by $2.848/MMBtu and more significant support at $2.75/MMBtu, as analysts expect a struggle to break below $2.75/MMBtu.

"The $2.75 level underneath is very supportive so I don't know if we can break down below there," Lewis said. "If we do, then the market could go as low as $2.50 underneath, but I think it's going to take a lot to have that happen," Lewis said.

FX Empire analyst David Becker is looking first for a test of the $2.80/MMBtu level and then a drop to the $2.50/MMBtu handle last seen in February.