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After Breaking Resistance; Bulls Take Profits, Market Lower

After Breaking Resistance; Bulls Take Profits, Market Lower

Technical analysis was originated by Charles Dow in the late 1800s as an attempt to interpret recurring historical price movements displayed by a group of stocks, which have since evolved into today's Dow Jones Industrial Average. He would have been proud of the natural gas futures market last week. For four days the May contract ebbed and flowed within a 10-cent trading range until it broke higher Friday in a technical buying spree. But as if it were following the same script rehearsed during the prior two trading days, the May contract couldn't hold onto its gains Friday, releasing them in the form of profit taking ahead of the weekend. The May contract capped the week with a 2.7-cent advance to $2.096 after notching a $2.15 high.

"Everyone was looking for confirmation that the rally in [the Thursday evening] Access session was legitimate. As soon as the market opened at $2.11 [Friday], the floodgates of buying were opened," a Houston trader said. Another trader, however, was surprised the market was unable to sustain the momentum to fill in the November chart gap up to $2.17 Friday.

A Gulf Coast marketer agreed that the market was very technically driven last week, adding that fundamentally all the stars were lined up. "Weather was cooperative, marketing companies are still short and utilities were buying gas to inject into storage."

Several other traders pointed to forecasts calling for below-normal temperatures this week as a supportive factor. On Friday the National Weather Service released its latest six- to 10-day weather outlook, which calls for below and much below normal temperatures in the eastern half of the nation the latter part of this week.

"It's like somebody reversed the slide on the overhead projector," said Tim Evans, of New York-based Pegasus Econometric Group, referring to the expected flip-flop in temperatures this week. "[Last] week it was the West that was cold and the East that was warm." However, he feels that in the end the market will focus on whatever part of the country fits its argument, which in this case is the East and the expected cold.

But weather was not the only morsel of fundamental data analysts were able to sink their teeth into last Friday. The Commodity Futures Trading Commission (CFTC) released its latest Commitment of Trader (COT) report, proving what many had suspected-speculators had completely reversed their short position and gotten on the long side of the market. As of April 6, non-commercial traders were net long 15,739 positions, compared with a net short position of 12,865 held just two weeks prior.

And the last time the speculators were that long? April 1998, when prices rallied to a high of $2.725 the same week the CFTC reported non-commericials were long more than 35,000 positions. "It's deja-vu all over again," quipped Evans.

He added that barring a quick reversal, the market will eventually form a broad distribution style top. "The trick is not to try and be a hero and pick a top too early. Wait until the funds are done buying before you sell, or else you will be selling into their rally."

He continued, offering two ways to time the market. "You could back off and look at a weekly chart. Weekly charts have picked a reliable top four out of the last five times." Alternatively, Evans says you can look at the hourly chart, not be too hasty and "go with the flow."

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