False Breakout, Trade Selling Stifles Rally
After a choppy week of range-bound trading, bulls found
themselves in the driver's seat Friday at the New York Mercantile
Exchange when weather forecasts and technical factors came into
agreement. Given the opportunity it didn't take long for
speculators, comprised mostly of local traders, to become buyers in
an attempt to push the August contract through resistance to
buy-stop orders that they knew were waiting in the $2.21-22 area.
However, what they failed to realize was that there was
considerable commercial selling waiting there as well, it proved to
be more than enough to satiate the buying demand. The August
contract notched a $2.225 high shortly after 1 p.m. (EST) only to
come crashing back to settle at $2.187, an 0.8-cent advance for the
"A false breakout" is how one trader viewed the market moving
above, then back below stubborn resistance at $2.205. "Everyone on
the floor was expecting the market to barely skip a beat in
trending higher [Friday]. But then again, nobody figured sellers
would come out so aggressively," he said.
But if locals were conspicuous as the buyers and commercials
were the prevalent sellers, where were the funds? Taking a break,
insists a Houston marketer who had just pulled the latest
Commitments of Traders report off the wire Friday afternoon. The
Commodity Futures Trading Commission said that non-commercials went
from being more than 40,000 net long to more than 10,000 net short
during the two weeks ending July 13.
Is it bearish or bullish that the non-commercials have reversed
to now hold a small net short position? Depends on whom you talk
to, a Houston marketer said. "I believe it is bearish. The last
time funds were flat the market was trading at $1.80. Now they are
flat again but the market has suddenly been enriched 40 cents. I
don't buy it. Technical factors aside, the market should be at
$1.95-2.00." However, he admits the market's natural reaction might
be bullish now that the funds are back to almost ground zero. "They
could just as easily go long as they could go short from here."
That having been said, many traders now turn their sights to
fundamental factors and specifically the weather, which they feel
will be the impetus for the next big move. Sources agree that if
the temperatures remain near normal and hurricane season continues
without any major threat to Gulf production, prices will have a
difficult time holding their ground.
Fred Gesser, of Omaha-based Strategic Weather looks for an
amplification of the upper level high pressure to bring high
temperatures and low precipitation back to the Midwest and Ohio
River Valley starting Wednesday. However, he feels this pattern
will be somewhat short-lived and expects the warm weather to
migrate to the East and then off the coast by the end of the
What about the prospect of hurricanes making waves in the Gulf
of Mexico? Not likely, unless the Bermuda High sets up closer to
the East Coast, maintains Gesser. The Bermuda High is a high
pressure system which can dramatically effect weather systems in
the Atlantic. If the high sits close to the Atlantic coast it tends
to steer storms farther to the west and into the Gulf of Mexico.
However, at its current position in the Atlantic, the Bermuda High
will tend to funnel storms up the East Coast and away from energy
production in the Gulf, he said.
New York-based Thompson Global Markets takes a more technical
approach. "The strong close and Access follow-through beyond prior
highs at $2.18 creates an outside up reversal pattern which may
spark some short covering. Failed support at $2.25-265 represents
the next serious resistance, with more selling on tap for the
$2.30-325 area. Prior highs at $2.42 and $2.495 seem too remote at
this stage to be a factor, the group wrote in its July 16 Power
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