January futures moved lower Friday on very light volume, but traders saw the market entering what could be a prolonged period of sideways price movement that could eventually lead to an advance. At the close January had fallen 5.5 cents to $3.114 and February had retreated 5.9 cents to $3.147. February crude oil rose 15 cents to $99.68/bbl.

Tom Saal, senior vice president at INTL Hencorp Futures in Miami, in his work with Market Profile was looking for the January contract to test Thursday’s value area of $3.175 to $3.121 followed by an eventual test of $3.273 to $3.237. Thursday’s value area was filled, but the fact that $3.273 to $3.237 was not prompted Saal to conclude, “We are going horizontal again, and I didn’t like the way the market ended. The whole week was an exercise in moving horizontal.”

Saal points out that the longer the market goes horizontally, “the higher the probability of a reversal [higher]. Given the bearish background of the fundamentals and the shorts leaning on it, the longer the market goes sideways, that pressure starts to wane.”

Although Saal thinks a long period of sideways trading will eventually work to the bulls’ advantage, others see a soft tone to the market with significant downside price risk. “Temperature forecasts that now extend out through about the first week of January remain skewed to the bearish side and until a shift toward more seasonal trends is seen, downside price risk of as much as 15 cents from [Friday’s] close will remain intact,” said Jim Ritterbusch of Ritterbusch and Associates.

“We feel that selling was quelled today [Friday] by some fund short-covering as well as a reluctance to press the short side ahead of an extended holiday weekend that could bring some significant adjustments to the short-term temperature outlooks. Regardless, this market will still need to contend with the dynamic of an expansion in the supply overhang that has been accelerating of late. Meanwhile, a two-month downtrend in the gas-directed rig count is offering only modest support and will prove capable of slowing further price drops while unable to place a floor into this market.

“All factors considered, we are maintaining a bearish view for now in anticipation of further price declines in February futures toward the $3 area. We will also be looking for some renewed expansion in the front switch [spread] next week as fund rolling of short positions has likely about run its course ahead of next Wednesday’s January expiry,” he said in closing comments to clients.

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