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Futures: A Textbook Reversal Or Bear Trap?

Futures: A Textbook Reversal Or Bear Trap?

The sell-off continued Friday at Nymex as traders liquidated long positions ahead of the weekend in response to some blaring technical factors and in anticipation of moderating temperatures this week in key gas consuming regions. The September contract probed lower to finish down 2.6 cents at $2.543 Friday. Estimated volume of 78,445 was low relative to the preceding five-straight, 100,000-plus trading sessions.

"A textbook reversal," is how Tom Saal of Miami-based Pioneer Futures views the market's rise and subsequent fall last week. "By setting a new high then closing below the previous three daily settlements Thursday, the market was susceptible to further selling [Friday]," he said. But several prominent Nymex floor traders had different ideas Friday and were seen leading the buying in an attempt to negate the reversal. Their push proved unsuccessful and prices were left to filter lower throughout the much of the afternoon.

Thompson Global Markets believes the selling pressure seen Friday may be a sign of things to come. "This wasn't even a question of buying the rumor and selling the news, but an even stronger indication that the market had simply exploited every ounce of potential buying, leaving the market vulnerable to even light profit taking," the group wrote in its July 30, 1999 Power Report.

But armed with the latest Commitments of Traders report released Friday by the Commodity Futures Trading Commission, Saal disagrees and feels the funds may still have some bullets left. Despite what he terms the largest non-commercial weekly net-position change in the history of natural gas futures (Speculators went from being short 9,882 to long 34,757-see table), Saal believes that they can still add to their positions in the days and possibly weeks to come. "They have probably sold a little of their length on the move down from $2.72. Now they will be waiting for the market to break back above that level before they add to their positions again," he said.

Commitments of Traders


As of July 27, 1999

                        Long   Change   Short  Change   
Non Commercial        44,019  28,485    9,262 -16,154    
     spreading        47,540   3,401   47,540   3,401    
Commercial           183,279 -14,788  239,311  36,583    
Total Reportable     338.410  21,224  338.410  21,224    

source : Commodity Futures Trading Commission. Report released July 30, 1999.

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