Yesterday was not a good time to walk away from your futurespositions to enjoy the Indian Summer weather. Just one week ago,near-month futures hit a record high at $5.78, but by the close ofregular trading yesterday, the November contract had settled belowthe psychologically important level of $5 for the first time sinceSept. 8.

After falling 21 cents the day prior, November futures endedyesterday’s regular session down 27.7 cents, or about 5%, to$4.951. The eight nearest futures contracts posted declines greaterthan 20 cents.

The key to understanding the psychology behind these majormarket moves is to forget about storage and look at the weather,said one broker. “We can’t go down fast enough this week, but wecouldn’t rally fast enough last week,” he noted in disbelief. Theonly major fundamental difference is the weather. “Last week wascolder than normal and we had a sharp rally with a little bit ofsympathy with crude oil thrown in there.” This week the weather iswarmer than normal, and now crude is losing ground. The warmweather also makes a large storage injection for the week morelikely, he noted. And the latest six to 10-day forecast from theNational Weather Service shows more above normal temperatures aheadfor the major Midwestern and Northeastern markets.

“This volatility has chopped a lot of people up,” said futuresanalyst Tim Evans of Pegasus. “Overnight we broke through theuptrend line at $5.18. The open outcry session opened with a gaplower, and what we’ve done since then is crack prior lows at $4.98,which was the low from Oct. 6, and we’ve now taken out the $4.96low which dates back to Sept. 12. This is the lowest level sincebasically the beginning of September. This is almost like a LaborDay sale we’re having here.” The November contract posted a low forthe regular session at $4.92, which matches the low set on Sept.13.

“This market is only good for short-term traders,” he said, buteven short-term trading can get you killed. “I’m flat right now andwalking a buy stop down just over the market. My next significantarea of support is $4.82-$4.86. We’re not that far away. I’d liketo sneak my buy stop down there enough so that I’m not risking 20cents on an initial entry into the market. In this market if youcan cut it that fine, I think you’re doing a pretty good job.Selling the opening with a buy stop over yesterday’s high wouldhave had you risking 30 cents, which is a lot, and that is ashort-term technique.” Without a new long-term fundamental trend,this market is bound to continue flailing about in typicalshoulder-month fashion, he said.

Some observers see a quick end to the fall-off, however.”Clearly this sends a strong message to people to dump their longpositions and we may not be done with the dumpage just yet,” said amarketer. “But I would maintain that we don’t have enough bearishnews to sustain this downtrend any more than we had the bullishnews last week to sustain the move beyond $5.78. We’rehyperventilating here, and there’s an awful lot of money changinghands. But the fundamental picture really has not shifted to anysignificant degree. For example we have a 407 Bcf year-on-yearstorage deficit. That’s identical to the year-on-year deficit wehad two weeks ago. The only thing different is the heating seasonis two weeks closer.”

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