The table was set for a bearish EIA report, but analysts at (and apparently the Nymex) did not think it was going to be quite as bearish as 11 Bcf. Thus, it is now do-or-die for Henry Hub bears in the wake of yesterday’s 5.1% plunge in the futures.
Yesterday the bears managed to defend two critical areas of technical support in front of the $4 psychological-barrier… but for how much longer? On one hand, there is little doubt gas is oversold. After closing above $6 back on January 6, spot Nymex gas has closed lower in 31 of the 49 sessions (63%) since; falling by 32% in the process. The relative-strength index (RSI) settled last night at 22.06, a seventeen-month low.
We also tend to see a countercyclical rally at the end of winter. Finally, on an equivalent heat value, Nymex WTI is trading at nearly a 250% premium to gas (the normal premium is around 60%).
But just because some oversold metrics seem to suggest gas is due for a rally does not make it so. After all, Lord knows the Washington Generals are due for a win, but that does not mean you should be taking the odds the next time they play the Harlem Globetrotters. In other words, just because natural gas may appear oversold, does not mean it cannot stay oversold longer than you can remain solvent.
For instance, the last time the RSI was this low was in August 2008 (in the wake of the bubble implosion) when spot gas was trading around $8. Two month’s later, on the eve of the 2008/09 heating season, gas was trading around $6.
Now, you might be inclined to say that this time it is different (the lament of every degenerate gambler). Consider that in the fall of 2008, gas (and oil) was crashing in the wake of that summer’s bubble highs and the global economy was in a virtual panic. So this time, it might be different… and the next time they lace up, the Generals might beat the Globetrotters.
Bottom line, if this time it is indeed different, then the natural gas rally began yesterday. On the other hand, if the bears cannot hold serve here, then put your hardhat on and lookout for falling prices. Henry Hub gas is at a critical inflection point. The immediate concern for the bulls is closure of the gap from last fall at 4.035 and the bottom of a Fibonacci fan (ratio scale) which was marked at 4.018 yesterday, 4.030 (coincidence?) today. Below here the $4 psychological barrier comes into play.
If bulls can foster support here, then the template is set for a nice rally; a rally that will likely be extremely violent, given the overwhelming bearish sentiment in the market.
On the other hand, if they fail, then we do not see support until, what our friend Dennis Gartman dubs the box, i.e., the 50/62% retracements (ratio scale) in between 3.836 and 3.437. And, if the bulls cannot defend the box, we will then have to start talking about gas with a $2 handle.
Stephen Schork is the Editor of and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.