June futures eased, to the dismay of market bulls who were hoping the contract would exhibit Friday’s strength and trade up to $8.23 Monday, or at least hold the psychologically important $8 technical support. instead, June settled at $7.913, down 3.1 cents, and July followed suit, dropping 4.3 cents to $8.091.
Even the hyperactive crude oil market failed to have an impact. June crude oil futures expire Tuesday and traders holding short positions lost no time in covering before contract termination. June crude oil futures jumped a stout $1.33 to $66.27/bbl.
A New York floor trader noted it was very much “a sideways day. We saw a little fund activity in the July contract, but overall trading was lackluster,” he said.
Although June futures eased Monday, followers of the Market Profile methodology are wary of downward movement continuing. “I wouldn’t be too short this market,” said Tom Saal of Commercial Brokerage in Miami. Saal based his observation on the fact that June futures traded as low as $7.840 Monday and tested an important “value area” of $7.789 to $7.850 determined by the trading of Wednesday, May 16.
These value areas are an important component of the Market Profile technique. 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. Value areas are derived from those distributions determined by daily trading activity.
According to Saal, the value areas next in line for testing of June natural gas futures are Monday’s at $7.843 to $7.916, and more importantly the value area established Friday at $8.038 to $8.212. Thus the idea of not being short the market.
Short or long, other traders see more fundamental factors as determinants of market prices. Mother Nature may hold all the cards. “Eventually, weather in the form of hurricanes or warmer-than-average temperatures will most likely be the cause that breaks us out of the [trading] range,” said Mike DeVooght of DEVO Capital. He noted that “the lack of either one of these factors could very well break the market lower, but this will most likely not occur until mid summer. In the meantime, we look for the trading range to continue and will hold current positions.”
DeVooght currently advises trading accounts to stay short a July position at $7.850 and end users to stand aside. Producers should hold short a June-October strip at $8.500 for 75% of production and a short winter 2007-2008 strip at $9 for 15% of production.
Near-term weather is in the bears’ favor as mild temperatures are expected to dominate key eastern energy markets. According to forecaster Accuweather, an area of high pressure building over the East will bring increasing warmth to the region in the days leading up to the Memorial Day weekend. The circulation around the high will allow warm air to flow north into the Northeast, bringing increasing warmth to most of the region in the days ahead. High temperatures through Thursday will climb into the 70s and 80s, the forecaster said.
By Thursday Boston should see a high of 79, and the normal high is 68. Philadelphia is forecast to enjoy a high of 81, though a normal high is 74, AccuWeather said.
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