UNG Follow Up

Tomorrow is Thursday and that means at 10:30 the EIA Natural Gas report will be out, which typically drives some intraday volatility in UNG.

UNG is one of my favorite long term long positions and a great example of seeing a change in character, seeing accumulation and not really knowing what it's about, but trusting it because usually by the time you find out what it's about, the money was already made. When we first started watching and buying UNG and trusting in the base, we didn't know what was going on with Nat Gas. Ever since then, it seems every month we get another reason as to why Nat. Gas is looking like it's going to be one of the next leaders in the market and many of us got UNG in the mid-teens.

In any case, the last update was posted on Thursday, March 28th. It looks like that update was pretty darn close, the next 4 charts and comments are from the last update linked above...

 "Perhaps "all gaps must be filled" as some contend now that HFT is here to stay, that means yesterday's gap up and +2.35% gain leaves room for a pullback to fill the gap, otherwise the trend in UNG has been pretty darn impressive since mid-February on a double bottom."

"Even the short term X-Over screen is long UNG, the second pullback is usually to the blue 22-day price m.a., although a pullback to the yellow 10-day would fill the gap."

 "A weekly Trend Channel, note the weekly candles also signal a loss of momentum and yesterday's gap looks a little like exhaustion."

"However where it counts, the trend is confirmed, the chart is signaling a pullback/consolidation, but not dramatic."

Now lets take a look at the same chart, just current (because there are some good concepts to note)...

 At the time of the last update we had the gap up at the two yellow arrows, we were expecting the gap to be filled. Both days were smaller bodied candles signifying a loss of momentum, the second day was a true "Star" and both days were on increasing volume. Increasing volume on reversal candles (bullish or bearish) tends to just about double the probabilities of the reversal candle being the real thing. The pullback is on lower volume which is good and the price pattern is pulling back opposite the trend in a sort of parallelogram (similar to a flag) so all of the signs of the pullback look healthy.

Also note that the pullback on the gap up is right in the area of significant resistance, a breakout above this level will take UNG from a stage 1 base to stage 2 "Mark-up" and that's where the trend or the "easy money" is to be found; so I'd much rather UNG pulls back and consolidates, takes a rest and gathers some energy before taking on that important resistance zone.

 This is out X-Over Screen which is seen above from the previous update. The point of this screen is to qualify crossovers so we have a better idea of what is a true cross-over and what is just whiplash. For a long signal the yellow 10-day has to cross-over the blue 22-day, the middle window has a custom indicator with quite a few different conditions that need to be met and that must cross over it's 22-day moving average in blue. Finally RSI 14 in the bottom window must cross above the zero line or actually the "50" level.

This screen is also useful in trade management. The first pullback is almost always to the yellow 10-day price moving average, all indicators must keep the long signal. The second pullback (depending on the type of stock) is usually down toward the 22-day blue price moving average. We saw an early pullback after the signal was given so the next pullback to the yellow moving average around the $21.25 area was not surprising. In the previous update as seen above I said, " the second pullback is usually to the blue 22-day price m.a." and it looks like that's exactly where it's heading.

 I had mentioned the 5-day chart and the candle, "the weekly candles also signal a loss of momentum and yesterday's gap looks a little like exhaustion." Last night I talked about price action being fractal in nature, meaning the same price patterns and behavior we see on a daily chart tends to repeat on an hourly chart, a 5 min chart or a 5-day chart. The candlestick pattern in yellow is a classic reversal signal with a strong first candle followed by a loss of momentum and a small bodied second candle (usually a Star or a Doji, both reversals in yellow are Stars at the second candle) and followed by a third candle that is a larger bearish candle that closes lower than the open and closes near or at the low of the day, these are considered confirmation of the reversal pattern; so it's likely UNG has a little more downside left in the pullback and a move to the 22 day moving average would be consistent with the 5-day chart's candlestick pattern.

Just like "3C" is a reminder to "Compare, compare, compare", looking at a 5-day chart (or longer) and its signals can often give you extra information that a daily chart doesn't have enough perspective to show.

Finally the 60 min 3C chart from left to right shows the head fake / false breakout which would be difficult to determine whether it was a real breakout or a high probability "false move", we had a lot of signals telling us it was likely a head fake move and there are a lot of reasons for a head fake move right at that spot, here are two links to the first two articles, "Understanding the Head Fake Move": Part 1 and Part 2. The price action following that head fake move is exactly why there was a false breakout there, it helped price make the move lower where it formed a "W" base with good 3C accumulation and the break out of the "W" base that show a confirmed breakout trend at the green arrow and finally a small negative divergence suggesting a pullback as noted in the last post, "the chart is signaling a pullback/consolidation, but not dramatic."

I think for some of the reasons laid out above (the 5-day candle stick pattern, the X-over chart's probable pullback area, etc.) UNG has a little more downside to go ad we'll likely see am upside candlestick reversal which we don't have now. I think UNG will be in a very strong buy/add-to position as the pullback comes to an end. We should also see strong 3C accumulation as it ends which is starting, but not quite there yet.

 The 5 min chart is just starting to work on a relative positive divergence, this should be leading by the time the pullback is done.

The 10-min chart shows the negative divergence where the pullback became very likely, but 3C is still in line with the price trend, this chart should also go positive by the time the pullback is over and that's when we'll want to look at buying or adding to positions if you have an interest in UNG.

As always, use your biggest edge over Wall Street, show patience and pick and chose your battles. I think UNG will be in an excellent area to buy or add-to very soon, I don't think it's quite there yet. As mentioned at the start of this post, this is one of my favorite long term long positions, I think this probably has years of gains ahead of it.