Alleviating overbought conditions, natural gas futures sifted lower Friday as traders took profits ahead of the three-day holiday weekend. By checking down to its $5.44 low for the session, the February contract filled in a key level on the charts. It closed at $5.536, down 10.9 cents for the session. Estimated volume was light in Friday’s abbreviated session.

“That’s about as bullish a 10-cent decline as there is,” commented one trader who looks for higher prices this week. Providing the weather forecasts hold, Friday’s sell-off was the perfect set-up to another up leg on Tuesday, he reasoned.

While updated forecasts available this week will hold the real price clue for natural gas, last week’s forecasts call for the continuation of frigid temperatures. According to the latest six- to 10-day and eight- to 14-day outlooks released Friday by the National Weather Service, below normal temperatures will continue for the eastern two-thirds of the nation through at least Jan. 31. That forecast dovetails closely with a weather outlook released last Thursday released by Salomon Smith Barney meteorologist Jon Davis (see Daily GPI, Jan. 17).

For Tim Evans of IFR Pegasus in New York, Friday’s softness was just a case of short-term jitters that sets up a buying opportunity once the pullback runs its course. “We continue to think that storage withdrawals for this week will run into 180-200 Bcf range….This would outpace both last year’s 126 Bcf decline and the five-year average 152 Bcf pull by a comfortable margin,” he wrote in a note to customers Friday.

And while some look for a move toward $6.00 this week, others feel that last week’s spike to $5.70 was an exhaustion rally that will serve as a market top. “Historically, the lowest average temperatures of the year are on Jan. 17,” a Washington, DC-based broker said. “From here on out, the calendar is working against the bulls. The weather cannot get any more bullish.”

And fundamentals are not the only factors pointing to lower prices. Also at work are technical dealings. “Elliot wave analysis will tell you that we completed the third wave on this move higher and a retracement — down to the $4.50 level — should follow,” the broker continued. “That will line up closely with the top of the October-November price level from $3.80 to $4.50….However, with long-term supply still a big question mark, I wouldn’t expect prices will trend much lower than that.”

Accordingly, he looks to sell into any strength this week. And while he admits that most of his customers favor the use of outright futures, he is also recommending several options strategies. One of them would be to simultaneously buy two slightly out-of-the-money February or March put options and sell one at-the-money call option. “If prices fall, you have protected two parts of your inventory. However, if prices rise you have only limited the upside on one part.”

In daily technicals Evans feels the market’s break of $5.55 has paved the way for a trip down to support in the area of failed resistance at $5.42 or even $5.34-36. However, once the market moves there Evans would be a buyer, using a $5.38 buy-stop to establish a 50% long position.

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