UNG Update

I've had UNG / UGAZ on my list to update since yesterday, however I have dozens of assets and indicators on my list.

You may have noticed this and I've talked about it a lot, "The leaders of the last bull market will not be the leaders of the next bull market", that's assuming we do have a next bull market and don't enter a secular bear market which is a very real possibility if not probability. Most will agree that we have been in a secular bull market since 1980 even though we've seen crashes like 1987 and the 2000 Dot./Com bubble, the 2007/2008 Subprime Bust, we have still stayed in a secular bull market, for so long I'm willing to bet that most people don't even recognize there's such a thing as a secular bear market. My opinion on the matter was elaborated on in depth in a 5-part series back in 2007 in which the 2008 decline was called out, but beyond that, looking toward the future, there are so many things that have created inter-woven problems that reinforce each other so that their sum outweighs the individual problems singularly. This is not the point of this post, however, my thoughts that Natural Gas is a candidate for a secular bull market moving forward are relevant.

In 1999 when I was trading stocks like HGSI, CSCO and JDS Uniphase or any of the dot-coms, I never would have thought that something historically as boring as housing would lead the next bull market after the entire world changed with the advent of the internet. However, over nearly 4 years of teaching Technical Analysis, well over a decade of publishing over 10,000 posts, the one chart I find to be of great interest and will often bring up is the accumulation of Home Builders during the 2000 tech bubble burst. Who would have guessed years in advance that housing would lead consumer spending and the next bull market years before it happened and stocks like HOV jumped over 2500%? 

The point in showing the charts, talking about the subject is that  Wall Street knows a lot more than you think a lot earlier than you think and it takes them a lot longer than you think to build large, multi-year positions and longer than you think to distribute them.

This is one char of a home builder I often talk about when on this particular subject, HOV. It's funny how people see home builders now after they made over 200% advances and were the momo stocks of their day vs. how people viewed housing as dull and boring before 2002/2003 through 2005/2006.

 Here we see nearly a year and a half of accumulation , mostly in to lower or flat prices and right when the tech bubble was exploding. How did Wall St. know that such a dull asset previously would lead the next bull market that was still a good 2-3 years away? 

This is a 2-day chart, but there are positive leading divergences out to 5-day charts and even longer, the accumulation period is significant and this isn't a secular market, just a bull market of several years, but the points about Wall St. being far ahead of the curve and the time it takes to accumulate a large position in an asset should not be lost on you.

 This is a 5-day chart of UNG over a longer period with a stronger divegrence in a relatively flat price environment. I suspect the coming move in UNG is not a rade, it's not even a bull market, but likely a secular shift in US Energy structure, this is what secular markets are about.

"Large-scale national and worldwide events, which occur in combination. For example, wars, demographic/population shifts and governmental/political policies are all events that could drive secular markets."  

Without too much thought I think you might immediately think of the shifting dynamics in the Russian/US relations and the fact the Europe relies on Russia for 1/3rd of their natural gas which transits through the Ukraine, not to mention the upheaval in the middle east, the governments that have fallen after decades of rule in a matter of months and I'm sure you can envision how this may change US Energy policy as we are elbow deep in natural gas relative to oil.

Looking at UNG on a closer basis, this attempted breakout on September 29th was written about during the day with the warning that if it didn't close strongly above resistance and on volume, it had a very high probability of falling below the lower end of the range which it has done , this is summed up in a simple head fake based concept, "From failed moves come fast reversals".

This doesn't tell me anything about the larger secular view of nat-gas, but it is important to open or new positions. On Sept. 29th we weren't sure if UNG would make the breakout, but we were pretty sure that if it didn't, it would head below the range support which is how it builds support for a new momentum move that can breakout of the range, just like our recent example using Financials.

At #1 for nearly 2 months I carried a 1/2 size FAZ (3x short Financials) position, my intention was to add the other half ABOVE the range where I'd have a better entry and average cost as well as lower risk, that breakout never came.

Instead XLF broke below support and on the first day of that break below support as my FAZ position jumped to a profit, I closed it. It was obvious that the move below support was a momentum creating bear trap to do what XLF could not do in the range, to break out above the range and this is where I intended to add back my FAZ long (3x short Financials) position and did at #3 and closed it as we came down at #4 as it was obvious from accumulation that this move up from mid October was going to be a barn burner, but ultimately end so I'm long FAZ again in to XLF strength/FAZ weakness.

I believe this is exactly what happened with UNG with the failed Sept. 29th breakout and what is happening...

Failed breakout leads to a fast reversal, however price is always deceiving. I suspected on September 29h as UNG was trying to break out that if it failed it would break below range support, but for the same reason mentioned above, not as a failure and mass sell-off of UNG, but as a momentum ignition move as shorts are pulled in and eventually squeezed, just like the October rally in the market, UNG should be able to breakout on the next run up which looks to be closer than I thought.

 UNG 4 hours has been in line all year until the Sept 29th failure and decline in which the first major divergence of the year in a 4 hour chart appears and it's a positive divegrence, accumulation in to lower prices and higher supply.

The 2 hour chart shows the first range breakdown we expected during the summer and the September one at the right red arrow, again, I believe that range was trying to breakout and it has only added to its divegrence since then.

The 60 min chart which is a very strong timeframe on its own shows the exact same thing.

Looking at price action, you probably see the proportionality as well, the only thing really missing here is a reversal process as "V" shaped reversal events are pretty rare and this would be a much stronger base with a larger reversal process (price moving sideways here for a little more time).

 The 15 min chart since the Sept.29 breakout attempt, also leading positive in to the pullback, this is exactly what we expected on September 29th if the breakout failed.

 And the 5 min chart with the Sept 29th negative which is fairly small and the 5 min leading positive (timing scale).

Today's move is pretty nice, but I don't think this is the ultimate move to break the 2 ranges above, I think it pulls back as the 1 min intraday chart suggests, widens out the reversal process and forms a base that can support the kind of move that is already accumulated. The gas is in the tank, we just need a strong corner stone./base to support the move, I suspect we see it very soon.

I continue to hold UGAZ long (3x long nat gas).