For those who haven't been around as long, UNG is a long time favorite as a long term primary bull trend that has been in the midst of a large base. UNG recently made a decent run off the lower end of that base and has been forming what is looking more and more like a H&S top, although it has to be kept in perspective, I suspect it's for a pretty decent pullback along the lines of a swing trade.
I decided to use DGAZ which is a 3X leveraged Natural Gas short to play the anticipated pullback in UNG, but long term (year or more), I expect UNG will be significantly higher.
As for right now, DGAZ is right at break-even and if I was interested in the trade, I'd have no problem entering it here (we do have an open long here) or even adding to it.
As I said yesterday, the area for both stocks is full of holes/gaps, so some short term bouncing and declining is likely, but DGAZ should see a decent swing move up and UNG, a pullback.
Also the H&S-like top formation looks pretty mature so I will reiterate, I like DGAZ long here for a trade os about swing proportions.
This is the 60 min chart of UNG. In green we have a healthy looking uptrend, it's within a channel and not too many wild moves, just a nice, steady trend. As we move toward the toppy area or lateral area, at the yellow arrow you see the ROC of price increase,
this is a concept you'll see quite often no matter what kind of top or reversal it is (even in a parabolic move). So this increase in the upside of price appears to be bullish, it's actually a warning not only as a change in character as they lead to changes in trends, but as a specific concept, the increased ROC upside of price RIGHT BEFORE it loses all momentum and moves sideways.
The H&S-like pattern is pretty clear as well.
Volume is the best way to confirm a H&S top. I always recall this 2010 price pattern that looked like a H&S top and a lot of traders swallowed it, but volume which is the key in confirming an H&S top, was totally wrong and as it turns out, it was no top at all.
I created an custom indicator really quick, it's like a cumulative volume indicator and what you want to look for is volume fading on the moves up, especially as the pattern develops (from the head to the right shoulder) and volume picks up on declines in the pattern. You can follow each price move and volume to confirm or you can eyeball it pretty quick and you'll get this almost mirror opposite effect as you see above where the red circles are, so I'd say this is a pretty decent confirmation signal.
We can deduce an estimated downside target for UNG from the price pattern measuring implications, which would be about $18.75 although those tend to be a little conservative as you have emotion on a move like that so they often overshoot the target like a pendulum swinging too far one way and too far the other.
The 30 min UNG 3C trends are very clear, stage 1 accumulation, stage 2 mark-up and 3C confirmation and as price gains in it's upside ROC, we get the first 3C negative divegrence which moves in to a stage 3 top, the next stage in our 4 cycles of a trend is stage 4 decline, the actual move we are trying to trade. This is really a pullback, but it doesn't matter, these 4 stages can be seen on daily charts, weekly charts, 30 min charts and even intraday.
Intraday what would be some of the right shoulder area we see distribution at the tops.
The 3 min chart as well is seeing migration from shorter intraday charts and leading negative from a relative negative divegrence just before.
For DGAZ, the 15 min chart shows 3C positive divergences in what might be considered an inverse H&S bottom, note how the same trends are here as well...we start at stage 3/distribution (red) to stage 4/decline and 3C confirmation (green) to a new cycle, stage 1 base or accumulation (white). Next is stage 2 mark up which is what we want to trade long.
The intraday charts are getting closer too which usually means we are very close as far as timing. Once again you can see the divergence with a quick and dirty look for that inverse price/3C action that allows you to draw a circle.
So I still like DGAZ, in fact if I had room I might add to it.
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