Three times on Tuesday, the natural gas futures market tried to rally above Monday’s spike high, but each time the market fell short, opening the door for commercial and local traders to punish the market lower. Selling was also seen from selected fund traders who view the market as overvalued from a fundamental perspective.

The January contract was dealt the biggest blow, tumbling 18 cents lower to $6.722. February was guilty by association and sloughed 15.8 cents to trade nearly even with the prompt contract at $6.723. With 86,558 contracts changing hands, estimated volume was down 15,000 from Monday’s frenzied trading session.

Sources polled by NGI agreed that Tuesday’s trading session was dominated by choppy, sideways-to-lower trading. The market’s inability to trade above Monday’s high was seen as a selling opportunity, and fund traders were quick to take advantage of the opportunity. “The funds are just about flat now,” hypothesised Nymex local market maker Eric Bolling (RBI). “They were net short about 42,000 at the close of business last Tuesday and considering the move up we’ve seen since then, I’d guess they have cleared out of those positions…. From here they could either get long or try the short side again.”

Bolling continued by pointing to a new breed of fund trader that has emerged out of the ashes of the fallen mega-marketers. “A lot of the guys who lost their jobs trading for the Enrons and El Pasos have wound up at funds, and they have changed the way a fund trades natural gas,” he continued. Historically, non-commercial traders or “funds” would buy or sell natural gas based on a predetermined technical trading strategy, which had virtually no regard for the underlying fundamentals at work in a commodity.

However, Bolling suggests there now exist funds that are headed by individuals who actually have some discretion in their trading actions. “It is not just computer-generated decisions…. They are looking at some of the same indicators that the rest of the market is watching…. They were scale-down sellers Friday and took some serious pain on the rally Monday,” Bolling said, adding that they were sellers again on Tuesday.

To make sense of the crazy market, Bolling chooses right now to focus almost exclusively on the March-April strip, which he likes because it consists of the last and first months of the winter and summer strip respectively. “[The March-April strip] has been unusually well bid as of late, trading as high as $1.15. If it continues to blow out, it is a good indication the market is not yet done with the upside,” he reasoned.

On the downside, Bolling admits that the $1 area is a touchy area for that spread — an area that might caution him to the prospect the market has turned lower. At the close Tuesday, the March-April spread stood at $1.115.

Looking ahead to Thursday’s storage report, market participants are forming a consensus around a 96-110 Bcf withdrawal. If realized, a number of that magnitude would be open to interpretation. While it would easily eclipse last week’s 59 Bcf announcement and the five-year average draw of 73 Bcf, it would fall short of last year’s whopping 162 Bcf takeaway.

In daily technicals, resistance is seen in conjunction with a combination of the 32-cent per day Gann resistance line in the $7.14-40 area and the 50% Fibonacci retracement of the February to November decline at $7.26, offers Craig Coberly of GSC Energy in Atlanta.

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