October natural gas futures continued to retreat in active trading Monday. The October contract opened sharply lower at $2.935 in electronic Globex trading and traders said $3 would be a formidable trading barrier to further advances. Spread trading was active and trend followers say the market has to make a sizeable advance before they would entertain switching from a bearish to neutral outlook. At the close October futures fell 5.6 cents to $2.977 and November gave up 5.5 cents to $3.998.

“Right now everyone is thinking $3 is technical resistance, but it is psychological more than anything,” said John Woods, senior trader at Integrity Energy in New York. He added that for the market “to take another shot back up” it would have to trade above $3.25.

Woods said spread trading was active with traders buying the October-November spread as well as October-December, October-January and October-February. “Guys have been buying October-November for quite some time, and it makes sense with the scheduled roll by U.S. Natural Gas [UNG] every month.”

Sept. 14 is the first of four sequential trading days that the U.S. Natural Gas fund will begin its monthly rollover from the spot October to November contract. At that time the fund will sell its October futures contracts and exchange them for November contracts. Traders buying the October-November spread are thus positioning themselves for the UNG roll to widen out the differential between October and November.

Traders who use moving averages as well as fundamentals to guide their buy and sell decisions say their models are in a definite “sell” mode and “are not even close to going neutral, let alone going long,” said an Oklahoma City broker. He noted that in order for his trading program to go flat, or exit a short position, it would have to close above $3.20. “We have had a cooler-than-normal summer for most parts of the country, no hurricane season, and industrial demand is very poor, so there are some strong fundamental reasons for us to be down here.”

Other traders have difficulty with these factors inasmuch as they have been around for so long. According to a prominent East Coast consultant, “the usual mantra of heavy storage figures, poor demand, mild temperatures and a lack of immediately threatening tropical weather on the horizon” gets routinely cited for market weakness. “Our continuing problem with these factors is that they have been discounted repeatedly, time and again, since last July (2008).” He added that “the quality and aggressiveness of the selling seems to get stronger and heavier and more goal-oriented as soon as a contract becomes the front month.”

Tropical weather remains in play. AccuWeather.com is following a large developing tropical wave in the central Atlantic about 650 miles east of the Lesser Antilles. It is tracking to the west at close to 15 knots, continues to grow and looks more like a tropical depression. “Some computer models ramp this feature up into a hurricane by mid to late week, so it will have to be watched,” say meteorologists Bob Smerbeck and Eric Wanenchak. According to their figures, the computer models track this feature toward or just to the northeast of the Leeward Islands by midweek. “By the end of the week, the system could be approaching the Bahamas.”

Natural gas prices may have gotten a bump higher with the 9:45 a.m. EDT release of the August Institute for Supply Management-Chicago Purchasing Managers Index Business Barometer. July scored a hefty rise to 43.4 from June’s lowly 39.4 reading, and observers were expecting continued improvement to push the August index to 48.0. The actual figure came in at 50.0. At the time October futures were trading at $2.947, and did manage to settle three cents higher.

©Copyright 2009Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.