UNG Fundamentals (Oil-WTI as well)

I have been planning on this post, but with UNG price alerts going off non-stop and a few member emails, I figured I'd try to squeeze as much as I can n now as it is material to the near term future (oil is a bit more of a wildcard with Republicans taking over Congress as it relates to phase 4 construction of the Keystone pipeline coming down from Canada- I suspect it will be vetoed by Obama, but that doesn't mean it can't pass the Senate which would be a bit of a trick I suspect)...

This is the count of US Natural Gas Rotary rigs and US oil Rotary Rigs in service...

As you can see nat gas rigs have fallen off.

 From Feb 2012 to September, oil rigs increased by 33%. Both Rig counts have dropped twice since August, usually reflecting a less optimistic view of prices for the companies running them. Nat Gas rigs fell from almost 2000 to about 300 from just a few years ago. However what's not reflected in the data is that Vertical rigs are the ones going off line while horizontal rig counts have remained constant. Horizontal rigs are much more efficient and cheaper to operate so there's more to it than the chart above depicts.

At the same time, production projections are for an increase.

It's a bit harder to analyze this data in the context of oil as Saudi Arabia seemingly was playing nice in cutting US oil price exports, but again there's more to that than meets the eye. The cost of oil from the Saudis is now so cheap that it's cheaper than the cost of producing shale oil, we'll see how this move that was supposed to punish Putin (which the Saudis used to their advantage to essentially shut down US shale oil ) plays out as these are newer developments.

Specifically with regard to Natural Gas rigs, as mentioned there's no sign that the number of rigs are going to increase anytime soon, but as mentioned, the projections for production are still increasing, this obviously is  hiccup for oil with the Saudi move, but not so much Nat Gas.

I said at one point we may want to look closer at a stock specific nat gas company with lower exposure to oil, there are a few out there and I'll be checking them out, but until then, I'd rather play the trend and try to avoid stock specific events that may run counter trend, news, earnings, etc. I'll be continuing this side of the analysis, but what matters most for me is what the market thinks, and that's on the charts.

We have a position in UGAZ long that I've decided to keep open. You may recall the range in UNG and the Sept. 26th make or break, breakout day and what the expected consequences near term of a failed breakout would be, it;s the same head fake, bear trap momentum building move below the range that XLF saw and I have posted at least twice over the last week as this is a concept that can be used with any asset, not anything specific to an industry group or stock.

We expected that if the Sept. 26th breakout attempt failed in UNG, it would run under the range hitting stops and pulling in shorts, a bear trap that would give it the momentum on a short squeeze to make the breakout...

As of today...

The failed September 26th breakout attempt did exactly what we thought it would do as posted on September 26th as we waited to see if the breakout would hold on volume, it didn't so our expectations were the same concept as XLF after it's failure to breakout a range...

This is a totally different trend (top vs UNG bottom) and scenario, but the concept is exactly the same, XLF failed to breakout above the range where I wanted to add to FAZ long(, instead it broke under the range where my FAZ long was profitable and I immediately sold FAZ the first day below the range, because the bear trap being used to do what XLF couldn't do on its own, meant I could take the FAZ gains and add them back later after the bear trap squeezed, which it did and I did add FAZ (3x short XLF back, where I wanted it, above the range. Agains the scenarios are different, it's the concept of a failure to have the support to break out of the range and the bear trap used to get the job done, this is why I sold a profitable position on the first day it made a move below the range, you see I didn't give up any gains either and XLF did what UNG just did.

UNG is at a nearly 5% gain today and our UGAZ 3x long Natural Gas long is up nearly +15% today, just as I had the confidence to sell FAX on the seemingly profitable break below XLF's range, I had the same confidence to hold UGAZ long because the CONCEPT WORKS THAT WELL, IT'S THAT PREDICTABLE.

As for the charts and moving forward...

UNG multi-day (7) 3C chart.

Like Home-Builders during the late stages of the Dot.Com bubble and in to the bust, Home Builders were under accumulation near their lows for 1.5 to 2+ years, as I often have said recently, "The leaders of the current bull market WILL NOT be the leaders of the next". Smart money being smart and well informed wit inside information were accumulating one of the dullest assets out there, housing and who would have guessed that after the Tech revolution with the Internet modernizing every aspect of our lives, the next rally/bull market would be led by dull housing? 

In like manner, I first saw the change in character in UNG's price and then the divergences, I suspect this is going to be a secular bull market in Natural Gas and we'd still be VERY low in the range vs what stage 2 mark up (bull market rally) would look like. Still I don't want to chase stocks up 5% or 15% in UGAZ's case, which I kept as an open position.

 The 60 min chart is the probabilities so I had no problem holding UGAZ long even though I suspected the failed breakout would send it lower, in the big picture it's not that much of a move in my view and not worth trading around.

The range is in white...

 The 15 min chart shows the range and the failure to breakout followed by the expected break of range support, but notice the 3C accumulation of that break as stops are hit and shorts jump in, it's a massive area of supply at cheap prices, easy to accumulate without attracting attention.

The 5 min chart shows the accumulation of that supply as well as a momentum building bear trap is et.

And on the breakout, thus far, as parabolic as today's move is,  we have confirmation of the trend.

If there's to be a pullback (in case you want to buy UNG), I don't think it's quite here and I personally would not chase this move, but wait for a pullback.

We want to watch for the price rate of change and look for it to start falling off and any lateral consolidation, that's where we may get a decent high probability pullback. Some have asked about using DGAZ 3x short UNG to play a pullback until they can buy UNG/UGAZ long, that's very aggressive and against all probabilities. There may be signals in the near future that make that chance worthwhile, but right now, I don't want to trade against these probabilities.

Remember the concept, it has been around a lot more recently than normal and it's very useful, it also works both ways.