UNG Update

UNG is another we have been watching and seen a recent change in character. As a matter of fact, when I was checking on the top 25/top 150 percentage gainers (1 day) for the Cats and Dogs trades, UNG had popped up several days in the top performing stocks as well as the top performing ETFs. Even more encouraging, it had done so on days when the market was down, thus showing it was able to trade up and as a best performer without needing market support.

 UNG is now in a triangle pattern, it's not so big that it can be ruled out as a continuation pattern yet, however, volume suggests that there's something more going on here then a consolidation which is typically on lower volume, especially in a bear market trend when low volume is a hallmark of a bear market. The next chart will give you some perspective on volume.

Recent volume is the highest ever, suggesting UNG has seen a capitulation event and thus the triangle is something other then a consolidation/continuation pattern.

 The daily Bollinger Bands, as you would expect with a developed triangle, are starting to narrow, implying a highly directional move. Again, just like with URRE, I would caution against expecting a "V" reversal, as such, any directional move should be put in its proper context, in my opinion that would mean the move has less importance then the triangle and any subsequent directional move would suggest.

 MoneyStream on a daily chart is also showing positive divergences, indicating accumulation. MS is calculated completely differently then 3C, they share almost nothing in common, yet they are both money flow indicators and both giving the same positive signal.

 This Triangle in my opinion is VERY obvious and too small to be a mature base. I would expect any directional move out of it either up or down to be a head fake move, we may be able to take advantage of it on a short term trade basis, which ever way it breaks. In my opinion, the most likely longer term outcome is a reversion to the mean if such directional move occurs and a bias toward further basing.

 The ATR in UNG is exactly the opposite of what I showed you several days back for the market averages which have seen averages such as: Dow-30, the S&P-500, the NASDAQ COMPOSITE, the NASDAQ 100, the Russell 2000 and mid caps, just to name a few, all see their ATR since the late December rally started, fall by 40 to over 50% even as prices are higher. The same thing happened during the Spring 2008 bear market rally. A healthy move should see the ATR at least stay within its normal range if not increase like we see here, it certainly shouldn't drop by more then 50%.

 Here's the daily Trend Channel hold a swing move (a bit longer actually), it stopped out at the red arrow, but again there were earlier warnings such as the Harmi in the yellow box and the fact that it occurred several standard deviations below the average price (oversold and flashing a reversal signal).

The 2-day Trend Channel has held a much longer downtrend and is actually still in effect, so it does not make for a useful stop for a long trade, but may prove useful on any trend up, here we see about 9 months of trend held in the channel.

 Ultimately the 3-day stop is the best, it held the entire downtrend here as well as a 2 year down trend mentioned in the caption of this chart.

 The hourly 3C positive divergence...

A 15 min positive divergence around the area of the triangle, so we may see a directional move up, it can be traded, but remember, a base is more likely before any sustained move.

Right now a stop for UNG is very hard to determine, lets let it play out a bit. If you want to take a long trade on a possible breakout, I would take it as soon as UNG passes $5.46, even intraday, you can set an initial stop at 5.36 or so, but then we'll want a trailing stop and pretty tight. In the case of a downside directional move, the same rules of entry apply, I would watch the $5.08 area. I would probably consider an initial stop around $5.20, although this is open to a lot of interpretation. A tight trailing stop would also be my preference. Either way, I think the most likely outcome is a directional head fake move followed by a return to the area to continue building some sort of base.