Natural gas futures continued lower yesterday as follow-throughselling on the heels of Friday’s disappointing close conspired withweaker cash market prices. Perhaps more bearish than its 11.9 centdecline, however, was the fact that August gapped below key channelsupport at $3.80 on the open. Traders agree that while breaking andsettling below support is bearish, gapping through can be acrushing blow for a market.

“We opened lower and got a little selling pressure from local,”said Ed Kennedy of Miami-based Pioneer Futures. “However, I wassurprised by the lack of sell stops. I expected to see more afterbreaking through support.”

Sell stops, or stop-loss orders, are a risk management tool thatmany traders utilize in an attempt to protect their position fromadverse price movements. In this scenario, a trader long on theAugust contract would have placed a sell stop below $3.80 in anattempt to either protect the profit or minimize the loss on his orher long position.

One possible explanation for the lack of sell-stops is therelative inactivity on the part of the funds or speculators.According to the latest Commitments of Traders Report,non-commercials held just 19,711 long positions or 6.2% of thetotal open interest of 320,201 on Tuesday, July 11. This representsthe smallest long position in percentage terms since January. TheCommodity Futures Trading Commission will release updated data thisFriday which will show the market’s profile as of the close oftrading today.

In the meantime, however, the market will need to get past somepotentially bearish news on Wednesday when the latest storagereport is released. While some believe another 70 Bcf injectioncould scuttle the market, Kennedy argues it could be asell-the-rumor, buy-the-fact opportunity. “[The bearishness] ofthis report was factored into the market last week and today.Everyone is expecting the storage report to be bearish and we couldsee some additional selling, but I would be surprised if pricesbreak below $3.60.”

In last night’s Access session, the August contract was well onits way, slipping another 4.5 cents to etch out a $3.67 low shortlyafter 6 PM (EDT).

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