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False Breakout, Trade Selling Stifles Rally

False Breakout, Trade Selling Stifles Rally

After a choppy week of range-bound trading, bulls found themselves in the driver's seat Friday at the New York Mercantile Exchange when weather forecasts and technical factors came into agreement. Given the opportunity it didn't take long for speculators, comprised mostly of local traders, to become buyers in an attempt to push the August contract through resistance to buy-stop orders that they knew were waiting in the $2.21-22 area. However, what they failed to realize was that there was considerable commercial selling waiting there as well, it proved to be more than enough to satiate the buying demand. The August contract notched a $2.225 high shortly after 1 p.m. (EST) only to come crashing back to settle at $2.187, an 0.8-cent advance for the session.

"A false breakout" is how one trader viewed the market moving above, then back below stubborn resistance at $2.205. "Everyone on the floor was expecting the market to barely skip a beat in trending higher [Friday]. But then again, nobody figured sellers would come out so aggressively," he said.

But if locals were conspicuous as the buyers and commercials were the prevalent sellers, where were the funds? Taking a break, insists a Houston marketer who had just pulled the latest Commitments of Traders report off the wire Friday afternoon. The Commodity Futures Trading Commission said that non-commercials went from being more than 40,000 net long to more than 10,000 net short during the two weeks ending July 13.

Is it bearish or bullish that the non-commercials have reversed to now hold a small net short position? Depends on whom you talk to, a Houston marketer said. "I believe it is bearish. The last time funds were flat the market was trading at $1.80. Now they are flat again but the market has suddenly been enriched 40 cents. I don't buy it. Technical factors aside, the market should be at $1.95-2.00." However, he admits the market's natural reaction might be bullish now that the funds are back to almost ground zero. "They could just as easily go long as they could go short from here."

That having been said, many traders now turn their sights to fundamental factors and specifically the weather, which they feel will be the impetus for the next big move. Sources agree that if the temperatures remain near normal and hurricane season continues without any major threat to Gulf production, prices will have a difficult time holding their ground.

Fred Gesser, of Omaha-based Strategic Weather looks for an amplification of the upper level high pressure to bring high temperatures and low precipitation back to the Midwest and Ohio River Valley starting Wednesday. However, he feels this pattern will be somewhat short-lived and expects the warm weather to migrate to the East and then off the coast by the end of the weekend.

What about the prospect of hurricanes making waves in the Gulf of Mexico? Not likely, unless the Bermuda High sets up closer to the East Coast, maintains Gesser. The Bermuda High is a high pressure system which can dramatically effect weather systems in the Atlantic. If the high sits close to the Atlantic coast it tends to steer storms farther to the west and into the Gulf of Mexico. However, at its current position in the Atlantic, the Bermuda High will tend to funnel storms up the East Coast and away from energy production in the Gulf, he said.

New York-based Thompson Global Markets takes a more technical approach. "The strong close and Access follow-through beyond prior highs at $2.18 creates an outside up reversal pattern which may spark some short covering. Failed support at $2.25-265 represents the next serious resistance, with more selling on tap for the $2.30-325 area. Prior highs at $2.42 and $2.495 seem too remote at this stage to be a factor, the group wrote in its July 16 Power Report.

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