Natural gas futures suffered their first major setback in five trading sessions Tuesday as commercial and local traders took profits in concert with weakness in the nearby crude oil pit. In contrast to Monday’s session, which climbed nearly a dime in the last 30 minutes of trading, Tuesday’s natural gas trading session saw losses ahead of the close as traders liquidated positions in preparation for the September expiry Wednesday. The prompt month completed its penultimate trading session at $3.483, down 13.4 cents on the day.

Many traders polled by NGI Tuesday were somewhat relieved by the sell-off following a string of price advances that had stunned even the most unwavering bull trader. “We moved up to these levels pretty quickly, without much of any correction,” a Houston-based trader said. “The profit-taking we saw [ Tuesday] was long overdue.”

In addition to the need to alleviate overbought conditions, traders sold natural gas Tuesday in sympathy with losses experienced in the nearby crude oil market. “We have seen a good run in crude and natural followed it on the way up,” said Nymex local Eric Bolling. “It came as no surprise when natural gas followed crude lower [Tuesday].” October crude finished at $28.83/bbl, down 45 cents for the day and 82 cents off its new high at $29.65 notched earlier in the session.

A few sources also pointed to the expiring September options and specifically $3.50 calls, which acted like a magnet for the September futures contract. However, Bolling was quick to dismiss that notion, saying that September options expired without much fanfare. “The funds continue to push this thing around. With equities not what they were, there is a lot of money finding its way into commodity funds and that can produce exaggerated moves in natural gas. The net effect of this inflow of cash is that it puts less emphasis on fundamentals and more on the price triggers that they all use,” he said.

A technical indicator that is growing in popularity among both commercial and non-commercial traders is Bollinger Bands. The middle Bollinger Band is typically drawn using the 20- or 30-day moving average. Then, by calculating two standard deviations above and below that mean, technicians draw an upper and lower band. Over the past several months, these limits have done a pretty good job of predicting when a market was ready to turn lower. Tom Saal of Pioneer Futures in Miami targets the upper band in the $3.80 area and believes this represents a good area to sell the market.

On the downside, Bolling would not be surprised to see a little more weakness Wednesday, but believes that if the market can hold the $3.30 level, higher prices are inevitable this winter.

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