December natural gas futures posted a modest retreat Tuesday as other markets melted down on European debt concerns and rising Asian interest rates. Natural gas traders, however, don't see the fundamentals of the market capable of supporting $3.90 December gas.

At the close December natural gas fell 2.7 cents to $3.818 and January shed 3.4 cents to $3.994. December crude oil plunged $2.52 to $82.34/bbl, gold dropped $27, the Dow Jones Industrial Average lost more 178 points, and the dollar strengthened.

"When the market hit $3.90 it was met with heavy selling. There is just no reason for this commodity to be worth $3.90 or $4 and I look for the market to trade down to $3.70 and see if there is any support at that level. The stronger dollar is not going to support commodities, and it's been a bleak day all over," said a New York floor trader.

He added that he did see some black box algorithmic traders selling Monday and concluded "these guys are hungry to reload on the short side."

Data from the Commodity Futures Trading Commission released Monday showed that as of last week directional traders weren't quite ready to take on any additional long or short positions. In its Commitments of Traders Report for Nov. 9 the CFTC reported a modest contraction by managed money in the open interest for both futures and options.

At IntercontinentalExchange long futures and options contracts (2,500 MMBtu per contract) fell 32,482 to 242,204 and short contracts declined 22,345 to 171,795. At the New York Mercantile Exchange long futures and options contracts (10,000 MMBtu per contract) rose by 7,593 to 134,611 and short positions rose by 2,399 to 192,035. When adjusted for contract size, long futures and options at both exchanges fell by 527 and short holdings dropped by 3,187. For the five trading days ended Nov. 9 December futures rose 34 cents to $4.210.

Other analysts see the market largely in the hands of Mother Nature for the moment. "This market needs sustained, bitterly cold temperature readings to eat through enough of the gas in storage to turn the outlook for prices higher, again," contends Peter Beutel, president of Cameron Hanover, a Connecticut-based energy consulting firm.

He added that the market needs "cold temperature forecasts combined with short-covering by funds to give us the bottom we thought we had in place last week. Without more cold temperature forecasts -- on a regular basis -- even a desire by funds to get out of their short holdings will have just a limited impact on the market's attempt to advance."

For now Mother Nature doesn't seem ready to cooperate as a below-normal accumulation of heating degree days (HDD) is forecast for the week in key energy markets. For the week ending Nov. 20, the National Weather Service predicts that New England will see 145 HDD, or 27 fewer than normal; and New York, New Jersey and Pennsylvania will have 127 HDD, or 31 fewer than the norm. The Midwest from Ohio to Wisconsin is forecast to experience 163 HDD, or 18 fewer than the norm.

Technical analysts following long-term trends in gas prices point out that the market could still drop more than another $1 and still be within the long-term trend. "With regard to the long-term up-trend line, a very distinct and persistent pattern repetition is visible," says Walter Zimmerman, vice president at United ICAP.

He points out that a double bottom is a common bottoming formation and has been in evidence at major natural gas market lows going as far back as 1991.

"A double bottom has marked every test of this long-term up-trend line," and there are big double bottoms at the $1.020 low of 1992, the $1.25 low of 1995, the $1.625 low of 1999 and the $1.760 low of 2002.

Zimmerman points out that natural gas futures may not test the long-term support line, which currently comes in about $2.60, but should find support at $3.20 to $3.23.

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