Natural gas futures bulls were repelled by resistance at $5.192 once again on Monday, resulting in the July contract retreating to close at $4.873, down 12.4 cents. The July contract has now failed that resistance test five out of the last six days, which oddly enough offers encouragement to both the market’s bulls and bears.

“The market has been very interesting to watch over the last seven days. We’ve had resistance pegged at $5.192 and the July contract tested that price level five of the last six days,” said Steve Blair, a broker with Rafferty Technical Research in New York. “On Monday we got to $5.182, but the follow-through wasn’t there. I think the market at this point collapsed under its own weight with people deciding to either take some profits or take a shot at getting short. If we settle above $5.200, then the next leg of the move puts us up around $5.500.”

On the downside, Blair said major support resides around $4.860 and $4.840. “On Monday we settled right above that major support level, so I don’t think we’re done with that $5.192. I think we’re going to see this market play around down here for a bit before heading back up again.”

Blair noted that the recent resistance failures put the market at a crossroads of sorts. “One theory is the more times we test an area, the more likely we’ll end up breaking through. However, the other way to look at it is the more times you fail, the point becomes solidified as support, or in this current case, resistance. Either way, the market is likely to propel. If we finally break $5.192, we’ll likely lurch higher. If we continue to fail, one of the failures is likely to result in a significant drop.”

Traders were still discussing the reports last week that the $1 billion hedge fund SandRidge Capital dropped 15% in the first two weeks of June on wrong-way natural gas trades (see Daily GPI, June 21). As first reported by Reuters, the fund was caught out when the March-April 2011 spread surged 75% on the recent natural gas futures run-up, leading some observers to draw similarities to Amaranth Advisors’ downfall, which occurred four years ago. Observers believe the fund was short during the recent rally.

“Everyone is talking about SandRidge becoming the next Amaranth, but I just don’t see the correlation,” Blair said. “Amaranth had $9 billion in assets and the reports are that SandRidge is valued at $1 billion. As for getting caught on the wrong side of a spread, there is a reason people call the March-April natural gas spread ‘the widowmaker.'”

While some market watchers anticipate market strength to come, others are not so sure. “We still see a market that should move higher longer term. But the wide trading ranges seen last week and the 20-cent range with a weak close on Friday suggest a market that may have spent its most urgent buying interest already,” said Peter Beutel, president of Cameron Hanover, a Connecticut-based energy consulting firm. In his view Monday morning, prices would be in line to move lower if they fell below $4.960.

“A break below $4.960 would suggest a test of the gap between $4.815 and $4.861, which was posted [last] Monday. Last week’s storage figure was less than expected, but we are going to need a series of bullish surprises at some point to keep the momentum moving higher. Hot weather, like the very humid air seen in the Northeast, is expected from midweek through the end of the month. That could help prices,” he said.

Natural gas traders concerned with only the directional component of the market added modestly to their long positions last week, according to government data. The Commodity Futures Trading Commission in its weekly Commitments of Traders report showed that for the five trading days ended June 15 holders of long natural gas futures and options contracts on IntercontinentalExchange (2,500 MMBtu) increased longs by 25,004 to 354,346 contracts and traders added 449 shorts, bringing the total to 35,515 contracts. At the New York Mercantile Exchange (10,000 MMBtu) longs fell 2,465 to 156,237 contracts and shorts declined 162 contracts to 187,478. When adjusted for contract size long holdings rose 3,786 and short futures and options fell by 50. For the five trading days ended June 15 July futures rose 38.1 cents to $5.189. Total long futures and options held by managed money now total 244,823, and shorts stand at 196,356.

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