Natural gas is trading slightly higher early Wednesday after posting a potentially bearish closing price reversal top the previous session. The price action suggests the selling may be greater than the buying at current price levels after a massive short-covering rally was fueled by a combination of a short-squeeze and heat related buying.
At 05:06 GMT, October natural gas is trading $2.593, up $0.13 or +0.50%.
Watch the Spot Market for Clues
In the spot market, forecasts of heat in the Midwest and East drove up spot prices, however, weaker spot prices at Henry Hub on Tuesday sapped the market’s momentum after it looked like the front month contract was poised to continue climbing, according to Bespoke Weather Services.
“As we have pointed out, this market is a cash-led one, and once cash prices came out a little weaker day/day, the early rally had reversed, especially at the front of the curve,” Bespoke said. “…The weather side of the equation remains bullish, with strong late-season heat in place, and that likely has had some enhancing effect on the cash market as well, hindering the ability to refill salts thanks to the higher demand.”
“A bigger test for cash will be starting late next week once demand really falls off,” Bespoke said. “We do see some cooler variability late month, though we suspect warmth comes back into October, which would gradually morph into a bearish factor if correct.”
Futures prices could fall sharply over the near-term should cash prices begin to trend lower. This is because short-covering and not so much the underlying fundamentals, have been the major catalyst for the recent gains.
The chart pattern could also determine the direction of the October natural gas market on Wednesday.
The major range is $3.000 to $2.045. Its 50% to 61.8% retracement zone is $2.523 to $2.635. Trader reaction to this zone will determine the near-term direction of the market. Basically, the upside bias will strengthen over $2.635 and weaken under $2.523.
On Tuesday, the market formed a closing price reversal top at $2.648. This potentially bearish chart pattern will be confirmed when sellers take out $2.571. If this move generates enough downside momentum then look for the selling to extend into $2.523.
The main 50% level at $2.523 is a potential trigger point for an acceleration to the downside.
The first short-term range is $2.126 to $2.648. Its retracement zone at $2.387 to $2.325 is the first downside target.
The second short-term range is $2.045 to $2.648. Its retracement zone at $2.347 to $2.275 is another potential downside target.
Markets tend to go down faster than then go up so things could turn ugly for the longs if they hold on to their positions to long. If long, make sure you have an exit strategy in place.
Since most of the rally was fueled by short-covering, the real buying has actually been weak so it’s not going to take much pressure to take out these weak longs.
This article was originally posted on FX Empire
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