Clicky

UNG, Natural Gas ETP, Trade Setup

UNG (US Natural Gas Fund ETF) has broken above this falling wedge pattern, on confirming volume to boot, also following what appears to be a selling climax. The bullish falling wedge pattern was confirmed with positive divergence & it looks like the 13/33 histogram is poised for a bullish cross after an extended sell signal.

UNG daily March 8th

UNG daily March 8th

There are a couple of ways to play this: The "safer" bet (and keep in mind that the term safe is relative, as UNG is a very volatile & should be considered an aggressive trade) would be to wait for price to break above Monday's reaction high of 6.17 before establishing a long position. The alternative, more aggressive option would be to establish a partial or full position here, adding when & only if UNG takes out the 6.17 level.

Personally & officially (as far as a trade idea) I'm going to go ahead and add UNG as an Active Long Trade here at 6.01 (official entry), or any level up to 6.22 and down to 5.75. My preference is to establish a partial position here in order to allow for a possible backtest of the wedge at lower levels, quite possible on a marginal now low. I will add to the position either on a backtest of the wedge but now lower than 5.75 with stop not too far below that level (to be determined on my average cost basis using at least a 3:1 R/R to the price target). T1 is just below the top of that gap at 6.45 with T2, my preferred target, at 6.84 (just below the 6.90 resistance level).

0
Mar 8, 2016 1:16pm|Categories: Completed Trades - Long, Gold & Commodities|Tags: , |18 Comments

18 Comments

  1. snp March 8, 2016 1:32 pm at 1:32 pm

    I like this.

    0

  2. pangblood March 8, 2016 1:53 pm at 1:53 pm

    Can a more aggressive trader use UGAZ instead of UNG, at my own peril

    0

    • Lisa Trading March 8, 2016 2:03 pm at 2:03 pm

      I guess you can, but I’ve been burned by UGAZ once and never want to touch it again. 🙂

      0

  3. rsotc March 8, 2016 2:05 pm at 2:05 pm

    @pangblood You’d be infinitely better off shorting DGAZ (3x Inverse Nat Gas ETF) instead, particularly if you plan to enter this trade with the possibility of expanding your price targets and letting it morph into a longer-term trend trade instead of just a swing trade that might only last a few days or weeks. That way, the decay suffered from these volatile 3x ETF would work for you instead of against your position. Shorting DGAZ could also prove to be profitable even if natural gas prices trading sideways for months while basing before moving higher (sideways choppy price action is when the decay on the 3x ETFs is most pronounced).

    With that being said, some brokers might not have the inventory to lend you to short DGAZ or maybe you are considering the trade in a non-margin account that doesn’t allow shorting. If so, UGAZ could work out well as long as nat gas prices move higher in a fairly steady uptrend without many red closes before your price target(s) is hit. G-luck!

    0

  4. Lisa Trading March 8, 2016 2:07 pm at 2:07 pm

    How does the FA support this bullish trend? I see the weather will be unusually warm for the coming days and NG inventory is still quite high.

    0

  5. rsotc March 8, 2016 2:19 pm at 2:19 pm

    Lisa- I’d welcome those more familiar with the fundamentals of nat gas to chime in but here are my thoughts fwiw:

    To begin with, the very reasons that you just cited (assuming those facts are correct, which I’m not disputing, just haven’t verified) are most likely already 100% factored into price of nat gas, as that is the widely held expectation. Take that a step further, assuming that a forecast of unseasonably warm weather IS already priced in, what happens if the meteorologists are wrong? (that’s never happened, has it? 😉 ) Fewer things in trading are more powerful when everybody expects one thing but the opposite occurs.

    Also consider that the charts typically lead the fundamentals by 6-9 months. Hence, once nat gas finally does bottom, you’ll start reading all the reasons why its is up 30%, long after that initial move has taken place.

    0

    • Lisa Trading March 8, 2016 3:23 pm at 3:23 pm

      Makes sense to me. Thanks Randy. Will take a position.

      0

  6. bluemagic March 8, 2016 5:28 pm at 5:28 pm

    Hi Randy and other friends,

    I shorted DGAZ yesterday at 32.1 and today at 29.4, and would like to hold them until NG tops. What would be the likely DGAZ target price? I can also use UNG price as the targets. Many thanks GL

    0

    • rsotc March 9, 2016 10:35 am at 10:35 am

      @bluemagic I also shorted DGAZ in as a nat gas long proxy yesterday as the case was made that nat gas very well may have bottomed, or at least is very close to a bottom. As such, I may very likely extend my price targets if the evidence continues to build that a bottom in natural gas is in. With that being said, if you’re planning to hold out until NG tops, then it would be nearly impossible for me to give a price target now, even on UNG. I will say, however, that UNG has an extremely well defined former support shelf around 12.45, which is now a wall of resistance (and a magnet, should prices start to approach that level in 2016 or 2017). Of course, as all NG tracking ETFs, even the 1x’s which use rolling futures contracts to track the price, are prone to slippage, I will ultimately align/confirm any longer-term price targets on UNG/DGAZ with the charts of $NATGAS (spot price).

      Again, as you seem to be on the same page as I am with a likely bottom in or near on NG, then I would just tuck away that DGAZ short for now (with the appropriate stops in place, of course) and only be concerned with either adding to it as time goes on (since your short position/exposure will shrink as DGAZ falls in price), and maybe micro-manage (add/subtract/reverse) the trade around some as some of the more significant overhead resistance levels on UNG/$NATGAS are hit. 9.25 is the first big level on the daily chart of UNG where I’d expect a considerable reaction at this time, then 10.07ish & then the big 12.45 resistance. Best of luck on the trade!

      0

  7. Mrg5a March 8, 2016 5:54 pm at 5:54 pm

    @rsotc
    Could you comment on the following trading concept: Nat Gas inversely correlates with SPX. I have heard that Nat Gas is a synthetic short of the market. Why would this be? Seems completely random correlation. Thanks

    0

    • rsotc March 8, 2016 9:05 pm at 9:05 pm

      I just glanced a 10-year chart with nat gas plotted against the $SPX and yes, there certainly has been a pretty clear inverse correlation in recent years. However, the two fell in near-lockstep during the meltdown from mid-2008 right into the early March 2009 lows in the stock market. Since then, they have had a pretty tight inverse correlation with a few temporary disconnects here & there.
      I am unaware of the explanation for this, assuming there is a fundamental cause & it isn’t just mere coincidence. I will say that one of the reasons that I went long nat gas (via a DGAZ short) because my focus in 2016 has been on various stocks & commodities that have a low or inverse correlation with the broad market (due to my longer-term bearish outlook), other than the two “risk-on” swing longs off the two major lows the market had so far this year. Should things play out the way I’m positioned right now, the US equities (particularly the risk-on indices: QQQ, IWM, etc..) down/short & nat gas up/long trade should play out well.

      0

  8. rsotc March 9, 2016 11:08 am at 11:08 am

    For those that can’t short DGAZ & would prefer to use leverage but not be exposed to as much decay as UGAZ, BOIL is the Proshares Ultra Bloomberg Natural Gas ETF which employs 2x leverage to attempt to track natural gas prices through the use of short-term futures (as the other NG tracking ETFs do). They also offer KOLD, the 2x short NG ETF for that that want to position for a potentially longer-term short trade to attempt to benefit from both a rise in NG prices as well as the decay from the leveraged ETFs, as some brokers might not have shares of DGAZ available for their customers to short.

    0

  9. pangblood March 9, 2016 3:19 pm at 3:19 pm

    @rsotc

    Randy, I noticed that you placed this under “active long trade’ instead of “swing trade’, does this mean you are expecting a longer time frame for the price action to materialize to your price targets (even though the price targets aren’t that far from the current price)?

    I can’t short dgaz, so I’m holding ugaz, and obviously a longer time-frame and volatility will wipe me out. Also what are your opinions of today’s price action, do you see the intraday pullback as a healthy normal reaction?

    Also I strongly prefer videos, but whatever’s more convenient with you would be best.

    0

    • rsotc March 9, 2016 3:47 pm at 3:47 pm

      @pangblood Good questions. First off, there are basically two main categories for long-side trade ideas: 1) Long Trade ideas (which included Long Setups & Active Long Trades) which are actually swing trade ideas, as my primary trading style is swing trading and 2) Long-term Trade ideas, which include longer-term trend trades & investments that are expected to last several months or more & typically offer above average gain potential. The Growth & Income Trades are simply a sub-category of the Long-term Trades category that have above average income or dividend yields in addition to above average potential for capital appreciation. Each trade category has a description just below it although I probably need to revise the description or name of the Long Trade ideas to clarify that those are swing trade candidates.

      UNG is both an Active Long (i.e.- swing trade) & Long Trade Setup (as it still offers an objective entry or add-on), with the current price targets relative nearby based on the 60-minute chart. I posted that I idea as quickly as possible right after another member asked my thoughts on nat gas as I really liked what I saw & just wanted to get the trade idea out there asap in case it started moving higher as it looked poised to do so.

      As per my follow-up comments, I’m also seeing some bullish developments on the longer-term charts and will likely add additional price targets to this trade based off the daily charts and if so, this trade will also be added to the Long-Term Trade ideas, as the potential for a multi-month or even 1 year+ rally (primary trend reversal) in natural gas prices seems very possible based on the charts at this time.

      FWIW, your UGAZ should do okay as long as NG starts moving higher in a steady uptrend with minimal pullbacks & periods of sideways consolidations. Hard to say if that will be the case but for the near-term, that wouldn’t surprise me. G-luck!

      0

      • pangblood March 9, 2016 4:02 pm at 4:02 pm

        @rsotc
        Cool!
        Also a quick question, what is the indicator that you are using (with the 13-33 setting) for the green cross?

        Thanks! Looking forward to your videos and posts 😀

        0

        • rsotc March 9, 2016 5:42 pm at 5:42 pm

          The red & green bars are a custom histogram that I created to give a better visual representation of the 13 & 33 ema pair, which often works well on a lot of securities & indices to define trends on that time frame. Here’s a video that I made a while back to show how I made it: https://youtu.be/ax6OJ20mmiM

          0

  10. ixtlanian March 11, 2016 10:02 am at 10:02 am

    UNG passed the T1 zone on orange scenario. Randy – thanks for mentioning UGAZ and DGAZ as proxies. It would be very helpful if you could list possible trading proxies for all your trade ideas.

    0

  11. pangblood March 14, 2016 12:06 pm at 12:06 pm

    @rsotc
    Hey Randy, can you provide a comment on today’s natural gas price action?

    Also, I really like the idea of making right side of the chart a subscription service, when do you think this will be implemented?

    0

Comments are closed.