UNG / DGAZ Follow Up-New Trade?

Yesterday in the UNG/DGAZ Follow up (for the DGAZ long) I said the following,

"My thinking as of now is that the weather is being discounted as UNG is up, tomorrow morning is the EIA Natural Gas report comes out, the best scenario would be a sell the news reaction as it seems the weather is already discounted. So I'll give the position until tomorrow to make that decision."

The EIA report came out this morning and it was the best scenario I could hope for. My guess was NG futures were accumulated (that I know for sure) while the US markets were closed Monday for MLK day, thus Tuesday we gapped up on more of these polar cold snaps. I was hoping the market had been discounting the weather and the EIA report would come in without a large, unexpected draw and the reaction would be to sell the news.

Here's this morning's EIA Nat. Gas Inventories...

 I highlighted the important part, the draw was no bigger than expected.

As for the UNG set up (daily chart)

 This is the prerequisite and how I deal with all H&S tops, even a small one like this. They have to have a preceding uptrend, a lot of people see H&S patterns in downtrends or without a sufficient preceding uptrend, they're usually random price patterns.  You can always and should always confirm with volume, you can create a simple indicator to do this using a cumulative indicator with the formula "V+V1" (volume today plus volume yesterday in a cumulative indicator). What should happen by the head is volume falls in to the rallies and increases on the declines, the left shoulder isn't important, but from the head to the right shoulder that volume needs to be there.

"A" is the preceding trend, "B" the H&S top, "C" is where technical traders short it on a confirmed break and "D" is where Wall St. shakes them out as this set up is a century old and predictable as can be. The red "X"s are the 3 places I'll short a H&S top, NEVER at the break down. This one went a bit too far, but I think it's salvageable.


NG Futures

 1 min intraday NG we have some chop, that's fine, we need  congestion long enough for a reversal process and if you are considering taking DGAZ as a new trade, you'll want to get it as low as possible (NG higher or near the top of this range).

The 5 min chart though is what counts and I'm THRILLED to see this leading negative divegrence in NG futures on the EIA report and in to it. This confirms my thinking, now we need the signals to confirm my thinking, that's all that really matters.

 And NG 15 min is already showing a negative divegrence, this is great so far, exactly what I was hoping for if not better.

Check the volume too, with a choppy range today that volume looks like churning.

UNG Charts

 from confirmation to a negative which will usually start on the 1 min chart and move to longer charts "if" the divergence is strong enough, this is what I call "Migration of the divergence" or strengthening.

We see the accumulation areas, here we see a 2 min relative negative so there's some migration at work.

Here we see accumulation areas and a 3 min negative so that's good as well

DGAZ (3x short Natural Gas or UNG) ...remember I LOVE UNG as a long term long, NGAZ long was a UNG pullback play, once it was over I intended on adding back some of UNG I took off the table (left some on the table as well).

 DGAZ 1 min is leading positive this morning, the slight negative is enough to send it back to the lower range and accumulate more, that's where they'll accumulate, not chasing price higher.

 3 min is leading so that's a good sign, the longer DGAZ stays here and builds a base and the stronger the divergence, the better looking the probabilities.

We even have a 10 min DGAZ positive divegrence from today only ...

So this is looking good although a bit early. For those who may be interested in DGAZ long, I'd give it a little more time. For those in it like me with drawdown, I think we'll be fine.

I can't add to the position, well I could, but I'd be violating a basic risk management rule, unless you planned to phase in to a position BEFORE you entered the first share, AVERAGING DOWN or Dollar Cost averaging is a BAD HABIT. We might get away with it here, but you try it one too many times and they'll be carrying you out feet first . 

I might look at a UNG put if the situation sets up, but that's more for members.

So far, so good.