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Weather, Short-covering Puts Downtrend in Jeopardy

Weather, Short-covering Puts Downtrend in Jeopardy

Ding-dong the downtrend is dead. Well maybe its not dead quite yet, but it certainly was dealt a potentially fatal blow yesterday when short-covering by funds quickly turned into a buying free-for-all as commercials and locals entered the fray. The August contract finished at $2.395, up 14.2 cents for the day. Nearly as impressive as the price action was estimated volume, which registered 113,049 contracts.

Several traders were at a loss to explain the upward surge Thursday following what many felt was a "disappointing" storage report released Wednesday night. According to the American Gas Association 78 Bcf of gas was injected into the ground for the week ending July 16. And although that figure was even with the 79 Bcf refill seen a year ago, it paled in comparison with market expectations, which centered on a 55-75 Bcf figure. However, shortly after the AGA released potentially bearish news, the National Weather Service countered with some price constructive information. In the six- to 10-day forecast the NWS expects above- and much-above normal temperatures next week for nearly half of the country from the Northern Plains eastward, including the upper Ohio and Mississippi River Valleys, the Mid-Atlantic and Northeast.

Those contrasting fundamental factors left the market in a quandary Thursday. It was either trend lower in reaction to storage or move higher in anticipation of continued hot weather. As is often the case, futures lived up to its name yesterday and sided with the weather going forward.

Can the market continue to add to its winnings ahead of the weekend? Not according to Thompson Global Markets, which feels that the market may be overbought and therefore needs to consolidate before trying a retest of the $2.495 peak from July.

"A tenuous position," adds Tom Saal of Miami-based Pioneer Futures in an attempt to explain the current price level, which is flirting with a settlement above the long-standing downtrend on the weekly continuation bar charts. "Everyone on the floor was talking about it today. If we settle above $2.35 [Friday] we will have broken out of the downtrend," he advised. And just how long has this downtrend been around? Since the week ending Dec. 20, 1996 when the January 1997 contract notched a high price of $4.60. If you draw a line from there down to the November 1997 contract high of $3.80 and extend it to today, $2.35 is your number. We have been flirting with the downtrend for 4-6 weeks now, but have not been able to settle above it on a Friday."

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