While natural gas snapped a 2-day losing streak on Tuesday, the close for the session was well off the highs of the day, a negative sign. This weak close led to further selling today, as the contract for November delivery declined 0.2.85% with a close at $3.170.
The sell-off has brought important support into play at the former highs established in early July and September 22nd, at the $3.166-$3.148 zone. This level reversed roles and provided support on October 10th and corresponds to a 38.2% retracement of the advance from the early October low.
Continuing to hold this former resistance would keep the contract well-positioned to resume the advance over the near term. However, should selling continue and this support give way, the liquidation of new longs, combined with the lack of additional nearby chart-based support below $3.166-$3.148 zone, could exacerbate the decline, resulting in further swift move lower that results in an eventual drop to the rising trendline shown on the weekly chart.
Open interest increased 5.7% from the September 30th close through the October 13th close, indicating that new longs entering the market drove the advance, a bullish sign. However, there is now the risk that these new longs will begin liquidating on a break below support.
Should this support be broken, there is a lack of clear additional chart-based support above the early October low, given the step trajectory of the advance from this bottom. Thus, Fibonacci retracements of the advance will be looked to as potential areas where demand may come into play. A 50% retracement would result in a drop to $3.114, while a 61.8% retracement would leave natural gas futures at the $3.065 level.
Weekly EIA natural gas inventory data will be released tomorrow at 10:30am ET.