Buoyed by hot weather and spiking Northeast physical prices, natural gas futures ended higher Tuesday, as commercial traders continued to favor the long side of the market. After touching the $3.00 mark Tuesday afternoon for the first time since Aug. 1, the September contract ebbed slightly to close at $2.975, a 1-cent increase for the session. With 102,854 contracts changing hands, Tuesday’s heavy volume in the gas pit lent credibility to the up-move.

Temperatures breaking the 100 degree mark and heat indexes approaching 110 degrees in the Northeast gave traders plenty of ammunition to push the upside Tuesday. In contrast to Monday’s rally, which was seen as technical buying by non-commercial fund traders, the slow methodical grind higher Tuesday was attributed to precautionary buying by commercial entities hedging for a continuation to the upside. And although Tuesday’s price increase was just a fraction of the 20-cent gain achieved Monday, market watchers were equally impressed. “We made a higher high, a higher low and a higher settlement,” a cash trader told NGI. “The market didn’t even attempt to retrace a portion of Monday’s run-up. That is bullish in and of itself,” he reasoned.

Tom Saal of Pioneer Futures in Miami agrees, and looks for more follow-through Wednesday. “We tested psychological resistance at $3.00 [Tuesday]. I wouldn’t be surprised if we moved above that area [Wednesday].” However, prices can not go up without correcting at some point. Pointing to a “failed auction” on the Market Profile technical trading system in conjunction with Tuesday’s $2.91 low, Saal sees prices eventually falling back to the low $2.90s.

Devised by stock market technician Pete Steidlmayer, Market Profile attempts to predict a market’s fair value using its recent history of price action plotted versus time. The system’s basic tenet is that a market will tend to revert to price areas where it was only thinly traded. Because the September contract spent precious little time down near Tuesday’s low at $2.91, Saal looks for a move back down to that level of support.

However, technical considerations may be put on hold, at least for awhile, Wednesday morning. Of more imminent concern to traders is likely be the overnight rally in crude oil, set in motion by a bullish supply report released after the close of the regular session Tuesday. According to the American Petroleum Institute, U.S. crude oil inventories decreased by nearly 9.5 million barrels last week. That easily surpassed expectations centered on a net drawdown of up to 3 million barrels. In overnight Access trading September crude was up 44 cents to $28.34 as of 7 p.m. EDT. September natural gas was following suit, up 4 cents to $3.015.

For Jay Levine of New Hamphire-based Advest Inc., natural gas at these levels represents a good “scale-up selling” opportunity. “I have not seen very much short-covering by the funds yet, but that is always a possibility. Right now I give this market a 10% chance of a short-squeeze, and I might buy some out-of-the-money October calls in the $3.20-30 area as insurance. Otherwise, I would look to buy September $2.90 and $3.00 puts in order to take advantage of a move back down into the $2.80s,” he said.

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