Choppy trading continued Monday in natural gas trading at the New York Mercantile Exchange as the market rebounded to take back a portion of Friday’s post-holiday and pre-weekend sell-off. At $6.604, the January contract gained 9.4 cents to close just off its $6.645 high for the session.

However, it remained well below last Wednesday’s $6.878 pre-holiday settlement.

Sources polled by NGI Monday agreed that the natural gas futures market is basically a weather market right now as traders react in a knee-jerk manner to each version of revised weather forecasts at their disposal. “The rumor was that it was [MDA] EarthSat’s updated medium-range forecast that spurred the buying this morning,” noted Hencorp Becstone’s Tom Saal.

According to MDA EarthSat meteorologist Paul Markert, MDA EarthSat did release a “Noon Update” Monday calling for a combination of below-normal temperatures in the Midwest, much-below-normal temperatures in the Northern Plains, and Arctic air into the Rockies in the 11- to 15-day time frame. In fact, the only bearishness in that apparently bullish report was the prediction for above-normal temperatures from southern New England southward down the east coast.

Looking ahead, Saal maintains that the natural gas futures market will continue to take its clues from the weather. However, to judge how far or for how long the market will move in a particular direction, Saal uses Market Profile analysis, which plots not just where a market traded, but for how long it traded at each price level.

The Market Profile was originally developed by legendary trader Peter Steidlmayer and applied to grain trading. Steidlmayer would plot trades as they took place in the grain pit and noted that they often formed a bell-shaped curve. His trading strategy would be to buy or sell the ends of the distribution with the idea that prices would return to the norm of the distribution. Furthermore, he found that in the longer term, as the market trades and forms a bell-shaped distribution, there will be areas where the market traded, but did so only briefly.

When these areas of so-called “negative development” occur, they often act as focal points that the market will tend to gravitate to and want to eventually “fill in.” By applying this approach to the natural gas marketplace, Saal has identified a significant area of negative development between $6.68 and resistance at $7.34. “That could be a target area, should this market decide to move higher,” Saal reasoned.

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