April natural gas futures backed off earlier highs but still managed to post gains in Monday's trading. Short-term traders and those with a longer perspective are divided on the market's next move with short-term traders favoring a continued decline largely on a fundamental picture that hasn't changed and long-term technical analysts see the market finding a respite from an oversold condition.

At the end of the day April natural gas rose 3.2 cents to $4.037 after trading as high as $4.10 and May added 3.7 cents to $4.110. April crude oil dropped 91 cents to $96.97/bbl.

"We dropped nearly 20% and were trading $4.50 [early February] and dropped down to $3.80, so this rally doesn't surprise me at all. I am surprised we didn't top out at $4.12 to $4.15," said John Woods, senior trader at McNamara Options in New York.

"If you look at the screen, some guys are just taking back their shorts, but when we got up to $4.10 there was a lot of wood [sell orders] up there, and some guys just reloaded on the short side. Everything points to this market going down. There is no reason we should rally from here," said Woods.

Woods went on to say, "When you see what storage we have and what the economy is like, there is no reason for a price rise other than the short-covering rally which we are seeing today. Realistically you can sell $4.10 and expect to buy it back 20 cents cheaper. Conversely if it were to squirt above $4.10 to $4.12, I think you would see more short-covering. Moving averages and technicals on a real big move point to a higher target at $4.25.

"The [fundamental] scenario for natural gas hasn't changed in the last two weeks," he said.

Fundamental changes or not, directional traders continued to exit long positions and add to short holdings, according to government figures. For the four trading days ended Feb. 22 the Commodity Futures Trading Commission in its weekly Commitments of Traders Report showed that managed money at both the IntercontinentalExchange and the New York Mercantile Exchange shed long futures and options and increased holdings of short futures and options contracts. Prices responded accordingly. March natural gas fell from $3.976 to $3.867 on Feb. 22.

At the IntercontinentalExchange long futures and options (2,500 MMBtu per contract) fell by 9,592 to 377,772 and short futures and options grew by 1,767 to 35,813. At the New York Mercantile Exchange long contracts (futures and options of 10,000 MMBtu per contract) declined by 5,249 to 132,435. Short positions surged by 12,051 to 294,052. When adjusted for contract size long positions fell by 7,647 and the ranks of short holders rose by 12,493.

Weather bulls may get some help in the form of the six- to 10-day outlook. Commodity Weather Group of Bethesda, MD, in its morning six- to 10-day outlook shows below- and much-below-normal temperatures making an incursion into the northern tier of states and protruding as far south as the Texas Panhandle. Above-normal temperatures are confined to the East Coast from New England to South Carolina.

"A surge of strong ridging over and north of Alaska in the six- to 10-day is forecast to send a stronger chunk of polar air southward into much of the U.S. for especially the 11-15 day timeframe," said Matt Rogers, president of the firm. "However, both the intensity and duration aspects should not compare to earlier season events. From an intensity standpoint, the air mass should modify (weaken) much faster due to the March sun..."

Market technicians suggest that in order to demonstrate that the market is forming a bottom, more work may be necessary than Friday's 13.3-cent rally, which sent April futures just over $4. "Is this finally bottoming action or a just much-needed relief rally for the oversold intraday RSI [relative strength indicator]?" queried Brian LaRose, an analyst with United ICAP.

LaRose is inclined to see merely temporary relief from an oversold condition. "At this time we favor the latter; however, all it will take to change our minds will be a decisive close above $4.136. [S]uccessfully clear this level and a test of the $4.457-4.643 zone would be anticipated. Turn lower from the $4.136 vicinity and a drop to $3.568-3.459 is still possible."

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