Despite an early dip and a temperature reprieve forecasted by the National Weather Service (NWS), natural gas futures stayed hot Monday, as traders continued to cover shorts following last week’s 14% rally. Saving their best for last, bulls were most active at the close Monday, as they pushed the September contract an additional 4% higher on the day to $3.267, a 11.8-cent gain for the session. Estimated volume was heavy with 105,487 contracts changing hands.

After failing to receive the much-expected sell-off Friday, traders were ready for a move lower Monday. With losses in the overnight Access trading session leading to a lower opening trade Monday morning, it appeared that the bears would finally get the retracement for which they had been looking. However, the September contract couldn’t even muster the selling interest to test the psychologically important $3.00 level Monday, and eager buyers did not stand around long enough to ask why.

According to the latest six- to 10-day forecast released by the NWS, the Eastern United States is expected to return to more seasonal temperatures for the last week in August. Further out on the horizon in its eight- to 14-day outlook, the NWS calls for normal mercury reading from Southern New England clear across the country to Arizona. Within this area of moderating temperatures, below normal readings are expected in the Southeastern U.S.

One possible explanation for the continued strength despite the weather forecast Monday is that the market is bracing for some potentially bullish news when the latest storage data is revealed Thursday morning. Citing higher demand brought on by lower gas prices, Thomas Driscoll of Lehman Brothers in New York looks for a 45 Bcf injection, 10 Bcf lower than his 55 Bcf prediction last week.

Similarly, Tim Evans of IFR Pegasus in New York believes the market was stingy with its storage injections last week. “Cooling degree day accumulations for last week were about what we expected (somewhat more than the National Weather Service had forecast) and we’ll leave our 40-50 Bcf estimate for Thursday’s DOE storage report intact,” he wrote in a daily note to customers Monday. “This will run somewhat below a seasonally adjusted 63 Bcf average and much beneath the 85 Bcf tally from a year ago, eating into the 279 Bcf year-on-year surplus.”

Kyle Cooper at Salomon Smith Barney in New York also looks for an injection in the middle to upper 40 Bcf range, but maintains that storage will still reach “full capacity” come Nov. 1. “Injections are still on pace to reach 3,200 Bcf or above by the end of the injection season…. Although prices may find support in this week’s EIA storage build, price pressure is expected to resume after that, as injection will likely return to the upper 50 to low 60 Bcf range in the later half of August and into September.”

However, the state of supply may not be the only thing playing into gas prices Monday. Also at work, traders agreed, were technical factors, which continue to emit buy signals. Of all the technical and statistical tools, the most widely-used is probably also the simplest to read and understand. Calculated as a straight average of the last 40 daily settles for a particular month, the 40-day moving average has — for years — been a great barometer of when to buy and sell the natural gas futures market. After spending three months below its 40-day moving average, the September contract settled above it Thursday, prompting many traders to quickly cover shorts and initiate new longs.

For some market-watchers, placing blind trust in an indicator that uses not one piece of fundamental or economic data to generate its buy and sell signals is foolish. For others, however, it is lucrative. “It is well known that non-commercial fund traders use purely trend-following mathematical models and the 40-day moving average is one of those,” said Tom Saal of Pioneer Futures in Miami. “It’s simple and it’s visual and when we get near the 40-day — or as the case was last week — settle above the 40-day, the funds start buying,” he continued.

The numbers speak for themselves. Using the 40-day moving average as a guide would have paid off handsomely over the last six months. Specifically, a trader would have realized a 92.5-cent gain on his long position from February 20 to May 22. Similarly, a trader could have pocketed another 51.5 cents by shorting the market on May 22 and riding that position until the September contract settled back above its 40-day last Thursday.

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