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Despite 13.3 Cent Blip, Bears Still Driving the Car

Every downtrend needs a good short-covering bounce now and again and that is exactly what it looks like February natural gas did on Friday, although it was a small bounce. After opening 32.1 cents higher Friday morning at $9.820, which also happened to be the contract's high for the day, the prompt month traded in an area between $9.580 and $9.760 before settling at $9.632, up 13.3 cents on the day but $1.593 lower than the previous week's close.

Those looking for an indicator of the market's direction might be advised to look at spreads, in particular the March-April futures spread, because it represents the end of the winter strip and the beginning of the summer strip.

Many of the top traders, including Nymex local Eric Bolling, pay careful attention to that spread. The trader said he believes it is an excellent barometer of the market's bullishness or bearishness. If the market prices March high relative to April, that is a bullish scenario. When March slips versus April, the market is losing its bullish conviction, he explained.

After peaking at $4.00 (March's premium to April) on Dec. 13, 2005, the March-April spread was trading at a mere 30 cents on Friday, reflecting the current bearishness in the market.

"While I'm not sure whether the dog is wagging the tail or the tail is wagging the dog, it seems that as the market fell that the March-April spread got hammered," Bolling told NGI. "If the big boys and the big players in this business are willing to sell that spread, then they really aren't worried about too much upside. In that respect, it may be the tail wagging the dog a bit."

Bolling noted that the March-April spread went to its lowest point "in a good six-to-eight months" on Thursday and Friday. "When the boys who really know what is going on in the industry are more than willing to step up and sell that spread aggressively, while I am generally a bull, I'm stepping aside because I don't want to get in front of this thing right now."

Despite his usual bullish focus, Bolling said he still believes there is some potential for additional downside. However, the trader warned that "one of these days when we get a cold snap in here, all bets are off."

Summing up action on Friday, ICAP Energy broker Brad Florer said, "We had a small short-covering bounce ahead of the weekend, but it was pretty anemic at that. Up 13 cents in this market is really just one tick up, so there was not much there. It felt like nobody really wanted to buy this thing and there certainly was no follow-through.

"Unit we get some weather on the horizon at least or we see something fundamentally change, I think longs are going to have a hard time finding any motivation out there," he continued. "Our weather guy said this morning in his report that Chicago over the next two weeks is expected to be 10-15 degrees above normal. For crying out loud, this winter just isn't showing up."

Florer added that the 1 Bcf storage injection in the natural gas storage report covering the week ending Dec. 30 really showed that demand destruction is "cranked up" right now. "A lot of that was just residential demand destruction coming onto the radar as people turned their thermostats down after that initial cold blast," he said. "I think that is going to continue for the rest of the year because once people turn the thermostat down and live with it, they are likely to stay that way."

As for the market's next move, Florer said it doesn't look very promising for bulls right now. "I think we will continue to see the length in the market getting out while the bears continue to press until they find some level that at least feels like it has a little bit of support," he said. "We haven't found that level yet."

Broker Jay Levine of enerjay LLC, said gas futures are "clearly on the defensive," adding that the market is unlikely to continue without a countertrend bounce. "Rarely does anything go straight up or straight down without some sort of countertrend, if not counterintuitive, move," he noted.

Market technicians see the market as still headed lower, but the journey might not be as smooth as some bears would like. An often useful technique is to model market moves in waves, typically a five-wave pattern known as the Eliot Wave theory, consisting of three waves in the dominant market direction interrupted by two correcting waves.

Sal Gugliara, vice president at United Energy, suggests that the current free-fall in natural gas futures falls comfortably within this five-wave pattern beginning when January futures peaked at $15.78 on Dec. 13. The first wave (down) was completed Dec. 16 when the market reached a low of $13.46, and the second wave (up) terminated when the market traded up to $14.49 in overnight Access trading Dec. 21. According to Gugliara, the current steep decline is wave 3, and he is looking for a spot at which wave 4 (up) might begin.

Bears need not fear, for if his analysis is correct what looks to be an up-move is likely to succumb to strong seasonal tendencies, which will take the market still lower. "If natural gas is able to hold support into next week and complete a sideways wave 4, the fifth leg should lead natural gas lower again," he said. He noted the most bearish case is for a market decline to $7.020. "Natural gas typically bottoms at the beginning of February sometime after the expiration of the February contract. Our intermediate and long-term trends remain bearish," he said.

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