Natural gas looks to be breaking out and it has John's attention. With monthly and weekly charts breaking out he is looking at futures contracts having the possibility of easily moving up to the 4.48 level which means there is a lot of options open for us options traders. And if you have been following us this week you know John is on a roll.
Natural gas (UNG) has recently caught my attention. While it was in a significant downtrend for the better part of a year it has recently been consolidating right under the $20 level. A look at the daily chart shows a long move down and then recently a sideways consolidation pattern. While this is typically a continuation pattern I am beginning to believe think that the next move may be up rather than an extension of the previous down trend.
* Over the last two weeks there been significant support above $18 and significant volume.
* The $20/$20.50 level has been tested multiple times and the more tests it undertakes the more likely it is to break.
* Both the 20 day and 50 day moving averages have turned upwards and UNG is trading above both.
If we zoom in a bit and take a look at the hourly chart we are presented with two scenarios
1. The rising wedge holds and UNG breaks through the $20 – $20.50 resistance level on high volume and a new long term up trend is produced
2. The head and shoulders pattern within the wedge breaks downwards and the downtrend resumes
I’m leaning towards option one but will be waiting for a breakout confirmed with volume in either case.
The broad markets along with metals have been on fire but in the last two weeks we have seen the sentiment become stronger. The extreme bullishness we are seeing has made it difficult for low risk swing traders to get in on the action simply because there have not been many sizable pullbacks. Instead the prices have been inching their way higher with very minor pullbacks before surging again.
The only way to take advantage of this type of price action in order to keep risk low is to take small positions when the market drops to the 5, 10 or 14 moving averages with a mental stop to exit the position if the market closes below the 14ma. Any position take up here should be small because the market is in runaway mode, meaning everyone is buying on the smallest of dips. The largest moves tend to be near the end of a trend which is why I feel this market could keep running for a few more weeks before taking a sharp plunge.
Natural Gas
If you have been reading my work over the past year you should know I don’t like natural gas. More people have lost money trying to play natural gas than any other investment vehicle out there which is why I don’t cover it very often. Many of you have been asking about Natural Gas (UNG) so here are my thoughts on it.
UNG has been in a down trend for several years and the only trades should be short positions at this time. The argument from some is that it’s undervalued and with winter just around the corner prices should go up. It’s a valid argument but price action is what makes traders money, not fundamentals.
The daily chart of Nat Gas below shows what I feel is about to happen. Remember, UNG is a terrible fund to be buying. Unless natural gas is moving strongly in your favor, this fund continually loses value simply because of the way its created.
Looking at the actual natural gas commodity chart is a different story… The trend is still down, but it does look as though it’s trying to form a base when looking at a 3 year weekly chart. That being said, there is still a very good chance we see gas test near the $3 level before starting a new trend so trying to pick a bottom here is not something I would be doing.
Trading Conclusion:
In short, the equities market is still in a strong uptrend. I’m not comfortable taking any large positions at this stage of the game but if we get a setup I will not hesitate to enter with a little money.
As for natural gas...trying to pick a bottom is deadly in a down trend as bounces tend to be short lived or flat. I will cover the dollar, gold, oil and the market internals in the member’s pre market morning video....
