Natural gas sees technical correction on its way after 70% hike

US natural gas went on a wild 70% run over the past month, but it's finally run out of steam. The price has pulled back to the 23.6% Fibonacci retracement ($4.27) and has been stuck there for a couple of weeks. Since it's been so hard for quotes to hold gains, the market might be setting up for a deeper fall toward $3.96 (the 38.2% retracement). If this level breaks, the next stop for bulls would be $3.70 (the 50% Fibonacci).

Technical indicators back up this story. The RSI cooled off from the overbought zone last week and is still pointing down. The MACD, which hit its highest point this year in mid-November, is also rolling over. Getting to $3.96 seems to be easy—there's not much support along the way. Nevertheless, the $3.70 target is trickier; it's close to the price where it traded back in May and June, and near the 50-day moving average. 

On the fundamental side, the usual seasonal build-up in US gas storage has stopped, meaning the refill season is officially over. Withdrawals are slightly above both forecasts and last year’s levels, yet they remain modest compared to historical averages, as yesterday's statistics said. Last week, the country only drew 11 billion cubic feet, less than half of the five-year midscore of 25 billion cubic feet. In general, the United States is still sitting on a comfortable surplus, with inventories staying 4.2% above the five-year average.

The market is fairly balanced right now. Higher demand is being met by record production, which just hit 113.1 billion cubic feet per day. A big part of that demand is coming from LNG export plants, as they ramped up their usage by 1.5 billion cubic feet per day last month. Unless winter shows up early and with a vengeance, the pressure on gas prices is likely to persist.

The following trading plan may come into play:

Sell natural gas at the current price. Take profit: $3.96. Stop loss: $4.60.