UNG/DGAZ

Depending on how aggressive you are as a trader, UNG should see a bit more of a bounce and DGAZ a correction, I'm not going to get that aggressive in trying to trim around the bond and I'll leave positions the way they are.

I'll  update the charts, but more along the context of the expected move, this appears to be nothing more than a normal correction given UNG broke under its H&S top (small, not major ) yesterday. There's always the chance of a volatility shakeout of shorts with a H&S top, but since I think the UNG H&S is more related to a pullback rather than an actual top and since it's much smaller than the typical H&S, I don't put high probabilities on a volatility shakeout (the third place I'll short a H&S top-after the initial break and a bounce back above the neckline that shakes out the initial shorts).

 UNG 60 min H&S top that broke yesterday. Technical traders chase stocks, but in their view, it's confirmation so any trader seeing this small H&S would be likely to set a price alert for a break under the H&S's neckline (red lateral trend line) and enter just as soon as there was a break, this is in their view, "Confirmation of the bearish price pattern", however Wall St. knows all of this, they know how technical traders think because the same dogma has been preached for literally a century.

Often on bigger H&S patterns we see what I call a "Volatility shakeout". This doesn't mean the pattern is any less real, it's just that Wall St. knows traders like to enter on confirmation which puts them in the position as it has already made a significant move down from the top of the head or right shoulder. Traders can't tolerate stops that large that they will put them above the right shoulder or the head so what they'll do, since Technical analysis teaches universally that once support (the neckline) is broken, it should act as resistance, is to put a stop just above the neckline which makes it very easy for Wall Street to shakeout these shorts and steal their shares at a more advantageous price, above the neckline.

the entire volatility shakeout would look like the above. Many other traders will wait for a bounce back yup to resistance (the neckline that was formerly support) and they'll enter the short there as long as it seems like the neckline is holding as resistance and they'll place their stop just above the neckline. This is actually a high probability/low risk entry if it weren't for the fact that Wall Street and any trader who pays attention knows that this is what retail will do and as such, will make a move to shake them out "S.O." This use to be my entry of choice about 15 years ago before Technical Analysis caught on with the advent of online brokers and it worked well.

I kind of doubt this is what will happen in this situation as I explained at the top of the post.

UNG's 5 min chart shows a bounce and it has started, but I think it's actually a healthy move for the DGAZ long (UNG trading short). For me, this has no bearing whatsoever on long term/Core/Trend positions in UNG, I just leave them alone.

 DGAZ which is the 3x leveraged inverse of UNG (actually inverse Natural Gas) is showing a similar 5 min divegrence which is the direct opposite as DGAZ is the direct opposite of UNG so that's good confirmation.

 However what is more important to me is the larger trade, it's the basis of the DGAZ long (Nat Gas short position). We have UNG 30 min above, accumulation and a head fake move in the yellow box to the left which serves as an excellent timing marker for the move as it did here and then a move up in UNG that is confirmed by 3C making higher highs with price (green arrow) and then we get the H&S pattern with a left shoulder "LS" a head and a right shoulder "RS". The 3C divergence at the head and continued through the right shoulder is exactly what we'd look for no matter how big the H&S top (this is small).

DGAZ 60 min chart has a bit more history, but you see the negative divegrence sending it down (this is where UNG is heading up with confirmation), the downtrend also has 3C confirmation as it makes lower lows with price (green arrow) and this confirmation of UNG. Then instead of distribution as we see at UNG's top, we have accumulation at DGAZ's bottom and a leading positive divegrence so once again considering these two are near mirror opposites, we have more excellent confirmation and the basis for the DGAZ trade. This is the reason for the trade so a shorter term 3 or 5 min divergence isn't going to scare me out of it.

 This is a closer look at DGAZ 15 min chart, it's actually an inverse H&S bottom, but the point is the reversal process (yellow) and the accumulation in to that process. The initial move up in DGAZ yesterday and down in UNG are a little sharp, not quite parabolic, but a little too vertical for them not to pullback and correct the situation. Allowing a move like this to continue is how you get thin moves that see excessive profit taking too fast and ultimately reduce the size of the move.

I drew in what I'd expect as far as a correction, this isn't exact, but you see what it does for the trend in alleviating that vertical move and in any healthy stock trend (I can't blame you if you are not use to seeing it because of the market's behavior over the last 4 years) you'll have a series of advances and corrections so it doesn't reach an overbought condition which is really what I described above, a move too far, too fast that gets sold and doesn't live up to its full potential.

This is the same idea on UNG's chart, a little too steep of a drop yesterday so a correction today is natural.

If this turns in to something else like a volatility shakeout, no problem. So long as the signals remain, we take lemons and make lemon aide. This creates an excellent entry for anyone who might be interested in the trade or even an add to position as it reduces risk significantly.