UNG / DGAZ Follow Up

This is the Thursday Jan. 9th UNG/DGAZ update which shows the concept of the volatility shakeout of a H&S top, my feeling was as a pullback move and not a full blown H&S, the shakeout move would not be likely, but once again the market proves that all of these concepts are fractal in nature and thus work on any timeframe you want to use them in.

If you are aware of the concept, then you know that the volatility shakeout above the neckline which is almost always an impressive gap up (the job here is to shake out the "Show me shorts" who entered on the break of the neckline) is the last place of 3 places I'll short a H&S top (the top of the head being the first, the top of the right shoulder being the second and a shakeout AFTER a break below the neckline which typically ends up somewhere around the right shoulder being the last place). This is what we have.

I'm watching UNG and DGAZ as DGAZ would make an exceptional long/add-to position, if risk management allows for it, at this level or in the area. I still think UNG is an awesome long term bullish (secular) play, but for now I expect it will make the pullback initially expected.

Before I bring up the charts, remember that we have the EIA Nat. Gas inventories at 10:30 a.m. this Thursday, because of the Polar Vortex I'd expect a draw beyond consensus and it's likely that this move (the last couple of days) is the market discounting that probability which happens to be in the right time and place for a shakeout move anyway.

 This is a 60 min chart of UNG, since the H&S wasn't that big, it's more defined on a 60 min chart. You can see the Left Shoulder, Head, Right Shoulder and Neckline. Retail traders are always looking for price confirmation before they move, we are a;ways looking for confirmation as well, but ours is earlier than price action.

The point being, this leads retail to chase so they'll enter a short on a H&S top like this as it breaks below the neckline which in my view is chasing, then they'll put their stop just above the neckline, some more experienced traders will put it up around or just above the right shoulder so we see these volatility shakeouts with almost every H&S pattern which is why this area is the 3rd and last area I'll short a H&S top as it's such a consistent concept.

 The UNG 30 min 3C chart shows a positive divegrence leading to upside then some distribution which is in the H&S area, the break which has 3C confirmation (green arrow) and we are still in confirmation, the divergence isn't leading positive so nothing is out of the ordinary at this point so that means we stick with the concept until proven otherwise.

 The 3x leveraged inverse for Nat Gas is DGAZ (long in this case) and as you can see, it has its own 15 min leading positive divegrence which essentially confirms UNG's negative divegrence as they are opposite each other. The fact we have confirmation is excellent as they are two distinct assets.

Nat. Gas futures also have something to say, this is a 15 min chart, you can see the positive divegrence at the bottom of the break down below the neckline so this is the volatility shakeout being put together and we have a relative negative divegrence (early) forming now.

The 4 hour Nat Gas futures also confirms UNG with a positive divergence sending price higher in to the H&S area and that area going leading negative so this is the strongest chart/probabilities, we just need to wait for the signals to mature (timing) and of course confirm the signals, but DGAZ should make for a nice entry or add to for a pullback play in UNG.

I'm kind of thinking that the EIA report might be about the perfect time for everything to align, I could see a sell the news event on a strong drawdown in the report because of the Polar Vortex.