Capping a 12-day, 45% price increase, natural gas futures reversed lower yesterday as traders locked in profits amid technical and fundamental price uncertainty. The December contract took the sell-off squarely on the chin, dropping 46.7 cents or 7.5% to close at $5.798. The out months also felt the sting as the winter strip (Dec.-Mar.) tumbled 37.8 cents to $5.537 and the 12-month strip retraced 29.9 cents to $4.821.

Natural gas generally is considered to be the second mostvolatile commodity (electricity being first) traded on a futuresexchange anywhere in North America. The reason has a lot to do withthe correlation between gas demand and the weather. That may havenever been so poignantly illustrated as it was yesterday when themarket was rocked lower by new medium and long-range forecasts thatpoint to normal and above-normal temperatures.

According to the monthly report released Thursday by the National Oceanic and Atmospheric Administration (NOAA), the next three months will feature a blend of normal and above-normal mercury readings. Specifically, the report (here) expects warmer than usual readings across the South, from Georgia to Southern California with normal readings elsewhere. And while that may not sound like an extreme case of global warming, it does represent a departure from NOAA’s previous forecast (see Daily GPI; Oct. 16, 2000), which called for a mix of normal and below-normal temperatures this winter.

However, fundamentals were not solely responsible for Thursday’s price erosion. Traders also were quick to point to extremely overbought technical factors and a market that was in need of a breather. Ed Kennedy of Miami-based Pioneer Futures has been warning his clients of the potential for a blow-off top for sometime. “This market has moved higher for two weeks. Once people started to liquidate, there was nobody left to buy. From that point the market just free-fell,” he said. Looking ahead, he believes this market might have seen its highs and looks for a move below $5.60 for confirmation. “You break below $5.60, and you will likely get another 20-30 cents of downside.”

However sellers may be a little hesitant to short this market after watching prices climb sharply off the $4.38 low on Halloween. For that reason, Kennedy will feel much more confident of his sell recommendation if the market can break below the long-term trendline, which is seen at the $4.60 level. Commonly know as “Trend 2000” because it began just a few days after the first of the year, the upward sloping price trend has been a powerful layer of support for the market. On numerous occasions thus far this year, the market has rebounded fiercely after testing the rising trendline (see Daily GPI, Nov. 9).

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