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Futures Direction Unclear as Traders Prepare for Expiration

Futures Direction Unclear as Traders Prepare for Expiration

Cautious selling was met with light, scale-down buying pressure at the New York Mercantile Exchange Friday. And when the dust had cleared and all the orders counted, both bulls and bears could glean something positive from the session. Bulls were quick to point to the $2.225 settlement, a 0.7-cent advance for the day. Bears, on the other hand, touted Friday's lower high and lower low as an indication the downtrend was still intact. Estimated volume of 77,538 confirmed the heavy activity in the pit.

There are widely divergent perspectives on the likely direction of the June contract heading towards expiration this Wednesday. Susannah Hardesty of Indiana-based Energy Research and Trading Inc. remains bullish on weather, storage and outstanding commercial short positions. While she doesn't rule out a breakout above the $2.40 level if commercial traders are forced to cover in an expiration-day short squeeze, she feels a June settlement in the $2.33-385 area is more likely.

What is the rationale for her prediction? Bullish June expirations in 1995, 1996 and 1997, which were all preceded by an upward move followed by a congestion or topping-out phase. "In all prior cases prices moved higher in the final four trading days and have made a final settlement near the top end of the consolidation band, but have not broken out to new highs," she said.

However, Tom Saal of Miami-based Pioneer Futures feels prices have a fair chance of moving lower in the near term. The 40-day moving average for the July contract, Saal argues, is a potential flashpoint for this market. "If we get a settlement below it, long liquidation by funds likely will propel the market down to the $2.10 level without too much problem." The 40-day moving average for the July contract was $2.219 on Friday.

But is the non-commercial segment of the market ready to take profits? According to Saal, it is. He points to the Commitments of Traders report released Friday, which showed that non-commercial or "fund" accounts have decreased their net long positions from 48,029 to 40,109 in the last two weeks. "That confirms that funds have already been liquidating positions on the sell-off since the beginning of May," he said.

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