UNG Broader Update

The most recent chapter in UNG really started September 29th when UNG was trying to break-out of a range,

This is an end of day chart of Sept. 29th, however at the time we were covering it, UNG was trading near the intraday highs.

Earlier in the day the following was posted...

"Our UGAZ long is up +19.32 % and it's making a breakout move today which needs to see volume pick up and hopefully some follow through so I suspect we'll know a bit more about this move of  over 3% in UNg today , by the end of the trading day, again look for the breakout to hold and increasing volume which we saw on the breakout intraday."

I have very little doubt that this was a sincere effort to breakout of the range, sometimes it just doesn't happen and I've covered this range topic several times over the past couple of weeks as it's a common recurring theme in how a stock will respond, or you might say a "Concept".

Also from the same post on Sept. 29th...

"I'd say a downside head fake/stop run below support would be extremely high probability, I simply had no evidence that this was any probability as of the 24th and still don't unless this breakout fails, then it might start showing signals with some probability"

As you see above, UNG did NOT have a strong close on the day, it barely broke out and lost the intraday highs rather than closing at them. Although there's no name for this type of candle, the point of candlestick charting is to get a quick visual representation of what happened during the day and what it means going forward; a candlestick (especially at a strong resistance area) with a longer upper wick means that higher prices during the day were rejected, this is not what you want to see on a breakout attempt. As to the higher volume, this is one of several reasons I believe it was a sincere attempt to breakout, volume had swelled earlier in the day as intraday prices broke above resistance, however as sellers stepped up and the breakout looks weak, volume tends to increase creating a mini churning event, often followed by a reversal (to the downside).

One of the recent examples I have mentioned was XLF/FAZ, although a different situation and different direction, the theme was the same.

This is XLF / Financials, I had opened a partial FAZ (3x short Financials) trading position in the range at #1 which lasted nearly 2 months, during that time I had been waiting on a head fake move ABOVE the range to add the rest of the 3x short financial position, FAZ. As it looked more and more like XLF didn't have the ability to make the head fake move above the range, I suspected a downside head fake move as these moved are largely about gathering momentum. 

At #2 on the first solid break below the range and with FAZ at a profit, most technical traders would be shorting XLF and buying FAZ, instead I closed FAZ as it broke below on 8/1 Closing FAZ Long.

I didn't leave anything on the table as you see XLF broke down and made no lower closes of any substance, rather this was a head fake move which allowed for accumulation as stops were hit and new shorts entered (providing supply) and ultimately sending XLF ABOVE the range which it couldn't do on its own without creating a bear trap for upside momentum (short squeeze). I added back the entire FAZ long (3x short XLF/Financials) after the breakout I had been waiting on at #4 and took gains on the break lower at #5.

While UNG is in a different situation, the concept of using a head fake move to achieve what the stock couldn't on its own is quite common.

Also from the Sept. 29th UNG post...

"I'm not worried about UNg/UGAZ, if it fails here, I have little doubt it will make the breakout, although I'd rather see it just make it here of course...."

Some concerns intraday for the breakout attempt...

"There is profit taking on the move as it is very parabolic which I wish it weren't, as impressive as they look, I don't trust parabolic move, hopefully that fades a bit and we get a few intraday pullbacks creating some support and shaking loose the weak hands."

As we already know UNG failed at the breakout, failed moves and failed parabolic moves (which is most often the case), make for fast reversals in the opposite direction and starting the same concept seen above in XLF (the FAZ trade)...

While this is an opposite trend, the concept of a failed breakout, a fast reversal and building momentum below range support, is what the broader concept is all about and as I stated Sept. 29th,

"I'm not worried about UNg/UGAZ, if it fails here, I have little doubt it will make the breakout, although I'd rather see it just make it here of course...."

Since all of this has occurred, we'd expect to see the move under the range accumulate, build momentum which is one of the primary reasons for head fake trades, whether the larger 2 step head fake in XLF or what's occurring in UNG/UGAZ right now.

Here are the charts since the break under the range,  price is rarely what it seems, a lesson I learned acutely back when I had trade department research and found it was useless near term as it was working on a much broader picture which was right on,  a simple matter of expecting smart money to build and deconstruct positions the same as we do which they cannot because of size.

 The positive 15 min divergence at #1 is one reason I believe the attempted breakout at the "white/red" arrow was legitimate, just failed and the divergence at #2 is an extension of #1, making it that much larger, it's the head fake area or short squeeze/bear trap, a momentum building area.

Since the downturn before the range which we had expected (going back to some longer charts), UNG has been in pretty good shape as far as longer term divergences and is still one of the few assets I believe can enter a secular bull market despite the broad market.

 This is the 3x leveraged UGAZ long position and its leading positive divergence.

As far as near term, we have a pretty significant gap today, it would be better if it were filled, probabilities over the last several years would say it will be filled and the 5 min chart is positive with regard to the reversal, but neutral here.

This is the gap on a 3 min UNG chart which is not confirming so I think a gap fill is a high probability.

For those interested in UNG or UGAZ long, a pullback with accumulation would be a high probability/low risk entry.

Using the 60 min X-OVer chart you can see where we had a sell/short signal which was pretty effective and when that ended and created a cover/buy signal (white arrows). Typically the first pullback after a new signal is to the yellow 10-bar moving average, at least on a daily X-over chart, on a 60 min I give it more room and would expect a pullback or at least not be surprised to see a pullback to the blue 22 bar moving average.

In addition to accumulation in to the pullback, I'd also like to see the X-Over signals maintain a positive bias.

The Daily Trend Channel can be used to set a stop and define risk, right now it's just under $20 (although I'd never put a stop at a whole number like $20). It should move up a bit more from here, depending on how long a pullback takes so I'll check it again on a pullback signal and see where the stop is, this is on a closing basis.

This would be a high probability/low risk trade entry as UNG is still very low in the larger base, the pullback would allow for verification of accumulation and the stop is very close.