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Downward Momentum Carries Over to Tuesday as Futures Break Below $12

After gapping under $12 in the overnight Monday Access session to open Tuesday at $11.80, December natural gas spent the majority of the regular session trying to rebound. The prompt month got as high as $12.07 before collapsing again to close at $11.86, down 34.5 cents. Tuesday's trade brings the week's total losses to $1.195 after only two days of trading.

"After trading lower in the overnight Monday Access session and notching an $11.55 low, the market on Tuesday attempted to climb back," said a Washington, DC-based broker. "We did manage to get back above $12 briefly, but couldn't hold it at the end when everyone threw in their cards."

As for the bigger picture, the broker noted that the market on Monday finally broke below the $12.70-14.70 trading range. "One of the basic principles of technical trading is that when you have been trading in a range and finally break down, the market tends to drop by the amount of the trading range," he said. "In this case, around $2 down to $10.65, which amazingly enough is the top of the gap to the penny after the first big gap up on Hurricane Katrina.

"Because these two schools of analysis both target $10.65, I tend to think that number is probably a number that a lot of traders are looking at on their charts as a support area for prompt month natural gas," the broker added. "I think the market will gravitate towards that level and possibly firm up as we approach it."

He noted that the power behind the down move Monday was also a function of trading within that $2 zone for as long as the market did. "What happens is when you are chopping back and forth within a range, everybody is getting whipsawed," he said. "They are buying the highs and selling the lows repeatedly. Once it finally breaks the zone, you get a very powerful move because people don't want to miss a second of the market. After they have all of these little whipsaw losses, they really want to try to make it back. It's tough to take the human nature out of trading."

The broker said end-users and unregulated marketers were doing a fair amount of buying Tuesday in near month contracts. "We also had a fair amount of some back month stuff done as well, which is tough to do on normal trading days. In the near term, I think we could see that $10.65. You have to remember that seasonally, this is traditionally a soft month for prices."

However, he warned that if Gulf of Mexico shut-in levels go stagnant and some cold weather were to come in, this market psychology could change in a second. "I am by no means saying that the natural gas bull is dead. I don't even think a correction back to $10.65 kills it," he said. "This market has shown it can put multiple dollars into the price very quickly. I think we are in a corrective mode that could get down to $10.65. I would change my tune and say that there is something completely different going on if we could close below $10.07, which is the bottom of the gap following Katrina."

Market bulls relying on technical factors to sustain their case may find themselves circling the wagons in the short term. Technicians have been looking for the titanic trend in natural gas futures to continue. It started with the expiration of the June contract on May 26 when it traded as low as $6.03 and reached a recent peak when the November contract reached a dizzying $14.75 on Oct. 5.

Technicians realize that these advances do not always carve out an uninterrupted path higher and rely on retracement analysis to figure out how far the advance might correct or "retrace" before it resumes its earlier advance.

Monday's free-fall provided just such a chance to test the limits of retracement techniques. The first support zone calculated by retracement analysis was at $12.690 and futures traders sliced through that like a hot knife through butter. The December contract settled at $12.205, down a towering 85 cents.

"If Tuesday gives another down day like Monday, then natural gas futures will be testing the pivotal $11.420 level straight away," said Walter Zimmerman of United Energy prior to trading Tuesday. He pointed out that $11.420 is an important 38.2% retracement of the entire $6.030 to $14.750 advance. "The case for another new high above $14.750 will be seriously weakened by a decisive close below this $11.420 point."

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