Natural gas futures retreated as observers see the market poised to work lower as it backs off from the upper end of its recent trading range. With prices as high as they have been recently, it may be a good time to sell, they say. June futures fell 3.9 cents to $4.131 and July skidded 4.6 cents to $4.225. June crude oil shed 43 cents to $76.37.

Traders see the market as not quite ready to advance. “We need to get above $4.235 and it’s just not there yet,” said John Woods, a senior trader at McNamara Options LLC, New York. In Woods’ view, the market is ripe for a short-term sale and “you set your [buy] stop close so that you stop yourself out if the market trades up above $4.255. These are all [trading range] numbers we have seen before, and the numbers basically back up what everyone says; there’s a lot of gas out there.”

A popular trade for playing what is still believed in some circles to be a bear market, or at least one constricted to a tight trading range, is to buy the October-January spread, buying January futures against a concurrent sale of October. That differential settled at $1.15 and “the goal on that trade is $1.20. It’s just a good spread for a bear market. If we go down to the bottom of the recent trading range, January could widen out considerably against October,” said Woods.

Others don’t see a bear market. “At the present time, we feel that much of the current trade simply represents technical influences that are being driven off of position adjustments by large speculators. The primary activity in this regard would appear to be some ongoing short-covering by the funds who will likely be seeking a better balance within their holdings ahead of the upcoming cooling season,” said Jim Ritterbusch of Ritterbusch and Associates.

He added that he was “maintaining a bullish trading posture for now and would suggest holding any long positions in the nearby contracts. Despite lack of upside follow-through [Tuesday], we are still viewing [Monday’s] attainment of fresh eight-session highs as reinforcement to our near-term bullish case. Eventual upside possibilities still exist to the $4.42 area basis the June contract.”

Analysts studying energy markets cite what they believe to be a period of price deflation for energy and financial traders, noting abundant supplies and world economies struggling to grow if not pay off their debts.

“We have been talking about a deflationary model for the other energy contracts, but natural gas is doing what it should do if there was a major low at $2.409 [September 2009],” said one analyst. He said he was hesitant to put natural gas in the same “boat” as the other markets. “Aside from deflationary effects, I see little reason for natural gas to head lower. I think we can get a nice rally into the end of the month if we can get above $4.35.”

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