UNG Updateu

My apologies, I have meant to get to this for days now, but the broader market has consumed my attention.

For the record, UNG or Natural gas more specifically still remains one of my favorite longer term long ideas, I'm talking more like secular long term as I believe there will be a dramatic energy shift in the US at some point, much like Brazil has moved almost exclusively to Ethanol and traditional gasoline is the alternative fuel now.

While I don't know what the events will be that will get us there, one thing I did not foresee coming and that I think will bolster natural gas as a domestic energy source in the US (besides its immense availability here) is the recent moves by OPEC to crush oil prices. This does not benefit OPEC member states at all, their revenues have fallen off dramatically. While T. Boone Pickens argues he's the expert on CNBC yesterday and that the drop in oil prices is due to a lack of demand which I do believe is truthful in so much as there is a global lack of demand as economic activity slows, I do not think the decisions by OPEC reflect what is really going on in oil and why price has fallen so dramatically.

This all "seemed " to start as a way to punish Russia for events in Crimea and Eastern Ukraine, to drive oil prices lower by using our "allies", the Saudis to quietly increase production despite OPEC which the Saudis admitted to doing, thus driving Russia's huge natural resource revenue stream lower in combination with numerous other sanctions and the effect has obviously been keenly felt if you look at the Russian Ruble as of late with a 50% decline in the currency and Russians out spending their Rubles at a booming pace to convert them in to anything tangible to maintain some value. This is effecting Emerging markets, western banks who have outstanding loans that will likely default, former satellite soviet states with guest workers in Russia expecting to see pain in their countries, and on and on we can go, but that's not the point.

What "may" have started as a way to punish Russia has clearly become a way to dismantle the higher cost US oil producing companies like those engaged in Shale oil. At these prices, it costs US companies more to produce oil than they can sell it for at market and as a result, they are scrapping oil rigs at an alarming pace in an effort to survive this onslaught by OPEC to crush the US oil producing industry which may come as a valuable lesson as world geo-politics realign and old friends become new enemies. One outcome may be to move toward a sustainable domestic energy source that isn't subject to the whims of Opec, that would be something the US has in bountiful supply, Natural gas.

So, as a macro economic theme and perhaps a new secular bull market as other opportunities to expand US natural gas production like European dependance on Russia for a good portion of its natural gas and how easily it can be threatened as we have seen previously over the Ukraine and again now once again over Ukraine, emerge as we do not ship much if any natural gas abroad currently. Who knows how it plays out, but there have been some interesting major changes of character in Natural gas over the last several years and I suspect as these harsh lessons are learned and the US oil industry is crippled with high cost producers run out of town permanently, once again giving OPEC sole control over oil, the US Congress may actually have to turn from the bribes of big oil at the threat of US citizens turning on them as oil prices once again rise after the US producers have been crushed. What good are campaign financing from big oil if the cost sky rockets and the US consumer turns on politicians that take campaign finance money from big oil to protect their monopoly on an energy source that is about as outdated as coal. 

In fact, just over a year ago government passed a new emissions law that makes any new power plants constructed moving forward, either nuclear or Nat. Gas, although that was not explicitly stated, the EPA emissions standards that were raised for new power plants rules our "clean coal" technology, leaving only nuclear and natural gas.

Our longer term forecast of a change toward natural gas however didn't come from this fundamental analysis that only developed after we put our forecast forth, it came from the charts and subsequent events have only reinforced what I believe we will see moving forward.

As to the recent slide in Natural gas, I wasn't able to cover it last week as it happened, but I believe it to be a short term event, one that was not easily predicted unless I am able to deploy the same analytical tools to forecast weather as accurately as the stock market, I'm sorry, but I'm not a weather forecaster and it's these types of fundamental events that are not reflected in the charts because they are not known, they are surprises that are only discounted after the fact which is exactly what happened after last Thursday's EIA Natural Gas report at 10:30 a.m. as usual. Today we'll see it at 12 p.m. because of the holiday tomorrow.

Here's what happened...

I'd pay attention to the first chart as the concept of stocks in ranges unable to power through to a breakout and the head fake moves used to create the momentum via a bear trap (I have given numerous examples recently of this concept including UNG, XLF and most recently IWM which we are still in) and even the Crazy Ivan shakeout. Even though Natural Gas is a very different asset than equities or the IWM/XLF, the concept is the exact same because it relies on the predicability of technical traders and their inability to think for themselves and blindly follow concepts or DOGMA that have been taught for over a century. Wall St. is VERY well aware of these concepts and uses them against traders EVERY day.

 First, like the XLF example I have given recently and the IWM example from the last week, here's UNG in a forecasted pullback from before June, in a 15 trading week range, unable to breakout to the upside, but not ready to fail either.

There were two attempts to breakout, both showed distribution in to them and both failed. At this point, just like the IWM and for the exact same reasons, the inability to breakout on their own, they get some help from a deceiving lever, the bear trap.

In white prices "seemingly" make a bearish turn below the 15 week trading range, but this is a head fake move it hits stops allowing smart money to accumulate on the cheap (thus providing support) and it draws in short sellers who see a strong support level of over 15 weeks broken. Technical traders love to enter trades on confirmation which leaves THEM chasing price , all too often entering at the every end of the move they are trying to catch. THIS CREATES A BEAR TRAP WITH SHORTS IN PLACE, THEIR MOST OBVIOUS STOP LEVELS ARE BACK INSIDE THE RANGE SO ONCE PRICE MOVES INSIDE THE RANGE TO THE UPSIDE, THEIR STOPS ARE HIT AND A SQUEEZE BEGINS, WHICH GIVES THE ASSET (UNG) THE ADDED MOMENTUM IT NEEDS TO BREAKOUT WHICH IT FAILED TO DO FOR OVER 15 WEKS BEFORE HAND.

At both #1 and #2, both breakouts above the range, we had pullback signals and were looking for entries near the lower end of the range. I still have about a half size position I can add to UGAZ long as I was looking for lower prices to fill out the position. The most recent range in yellow to the far right looked like it would be a suitable entry on a head fake move below the range (of 1 -3 days) and a swift move up-following all of the same concepts that preceded this range, just in smaller scale.

However, at last week's EIA Natural Gas Inventories a few things happened.

This is last Thursday's Nat Gas inventories knee jerk reaction, initially higher at the 10:30 release and then lower, not unusual and we didn't have any strong 3C signals that would suggest anything specifically was going on, it turns out we would not have had those signals because the reaction to the EIA report was a fundamental news reaction, meaning it was new information that the market had not discounted and thus the rapid decline as the market sought to discount the new information. This is not something we can predict, it's like trying to predict a 9/11 type event, it just happens, there's no advance notice any chart can give you, yet the market will act swiftly to discount the new information.


That's what happened...

From the EIA report inside the yellow box to the following days, the market discounted one piece of information.

November of this year began a strong cold snap, some of you may recall the 7 feet of snow in parts of New York, but since then it has become uncommonly warm, right now as I write this Buffalo, NY which saw 7 feet of snow in November is unseasonably warm at 57 degrees. Boston at 45 degrees, even Chicago is above the freezing mark at 39 degrees- so much for a white Christmas. In Anchorage, Alaska some residents are wearing shorts and t-Shorts as the total snow-fall is some 2 feet below the average for this time of year.

While I would not normally associate this price pattern with an Island reversal, the gaps between November 3rd and December 1, it may very well be that UNG was struggling to build on the breakouts, both of which showed 3C reversals which is why we were looking for entries toward the low end of the range, because of the unseasonably warm weather.

Again, I'm no weatherman, but I do know that Winter didn't officially start until December 21st and runs through March, the possibility or even probability of colder weather remains. While this has little to do with the macro theme, it has a lot to do with a potential new position or in my case an add-to to fill out the partial UGAZ long position that' at about 50% of a full position.

This however is not what caused the volatility to the downside starting on the EIA report at 10:30 last Thursday. EIA reports for Nat Gas inventories have been positive for nat gas prices most of the last year,  however something changed with last week's EIA report,  a draw of 64 billion cubic feet from stocks , however for the first time they reported that inventories stood +0.2% higher than inventories a year ago at this time, this of two major events is what traders chose to latch on to, the first time inventories were higher than a year ago even though they remain -7.3% below their 5 year average for this time of year.

Inventories have remained higher than usual the last few weeks due to unseasonably warm weather, if the trend continues, the 7.3% below the 5 year average we currently see will start to be chipped away at.

However, traders may have missed the forest for the trees or they may have intentionally done so because they did in fact see the forest and used short term events to allow them to accumulate based on longer term realities and the longer term reality is this...

The day before inventories were released, Governor Cuomo of New York banned Hydraulic Fracking in the state. New York has large Natural gas reserves in the Marcellus Shale that runs through the state, making the actions taken by the governor the most significant region to ban Fracking over health and pollution concerns. It doesn't take much to realize that the unseasonably warm snap pales in comparison longer term to the actions NY state has taken that ban the process by which Natural Gas is obtained and in the largest region thus far effected by such a ban.

While the shale region runs from Virginia to the Canadian border, New York's decision may be an important precedent that lowers the volume of natural gas, then this becomes a simple supply/demand issue favoring higher Natural gas prices, irrespective of longer term geo-political developments and US Energy independence. It "seems" traders focussed on the forest of the .2% higher inventories rather than the news the day before of the NY state ban, although it may be that they actually are taking the long view and using the short term .2% issue to create lower prices to accumulate ahead of anticipated higher prices starting with the NY ban and perhaps others to follow not to mention the geo-political events, although Thursday and Friday saw 300k contracts traded so maybe not, but the overall news, which is why I almost added to the UGAZ long today as the EIA released nat gas inventories at 12 p.m. looks bullish for Nat Gas prices, I just figured we are low enough that a few more hours of 3C data can't hurt, and I'd rather have probabilities in hand which I can't get in an hour than to just jump in, although longer term I think this is very positive.

As Warren Buffet said, buy when there's blood in the streets, that's probably the case in UNG, however I wonder for how much longer with larger geo-political events likely to change US energy policy at some point sooner than later as it now becomes a matter of national security and of course the NY state ban which is big on its own, a simple cold snap can change everything with those two larger events in the background.

Last year it wasn't until January and February that Nat Gas got going up to $6.50. Additionally we are at over 1 year lows, that alone can cause the same short squeeze momentum concept as a head fake move that was not inspired by fundamental events (meaning those that are unpredictable).

Like I said, UNG/UGAZ prices are low enough that if I find there's stronger accumulation, adding to them in the area makes sense so waiting a few more hours for more data as today's EIA report was a mere hour before the close of trade, giving me little to go on, then I'll wait for additional data, but there are at least two pieces of recent data that suggest this may be an excellent buy/ add to area.

First...

 Recently the 3C data looks like UNG is looking for a bottom, this is UNG 3 min, but also in futures.

The 15 min chart of Natural Gas Futures shows the same positive divegrence, perhaps the discounting has run its course or even beyond it.

And secondly, with the little data able to be collected in the last hour, I used the fastest version of 3C since the 12 p.m. inventories and...

 It looks like a leading positive divegrence and positive reaction .

Also the 1 min Nat Gas futures shows the same.

I'll let more evidence either build or not and make a decision, but I like UNG for the long term so I want to be careful about making long term decisions based on short term price action (meaning the recent fall which may actually be a blessing in disguise for longer term traders).

And with that, I wish all VERY HAPPY Holidays. I'll see you on Friday!

Quick Market Update

As mentioned yesterday, the market "looks" like it's being pinned in place, pretty much lateral especially compared to last Wednesday, Thursday and Friday on the F_O_M_C knee jerk.

TICK action today has not exceeded + or - 750 all day thus far.

HYG has broken lower with negative divergences in 1 through 10 min timeframes.

SPY 1 min is in line intraday, but from 2 min it is leading negative, again the look of a thin facade of market strength or at least keeping prices in the area until traders return, no large fund wants to see an emergency cancellation of their extended holiday vacation on events in the market, but clearly the ROC has changed as have the 3C charts.

The Q's are more negative overall as they have been for the week and the IWM is also negative in the short term timeframes we need to turn. I believe we are in the area of the end of the Crazy Ivan upside move after the previous week's downside move which was the momentum set up for the Crazy Ivan just as this move is the momentum set up for the reversal (a bear trap first and a bull trap presently).

The Index futures are now showing the 5 min charts negative, which was what I was waiting on this week, from this point forward, I'd call the market very unpredictable and other than trying to keep it in place as to not have to call back trading staff to deal with a volatile break in the markets, I'd say we are at the area in which virtually any point could send the market lower quickly as failed moves have extremely fast momentum, just as did the failed move last Monday/Tuesday below the IWM's range leading to the strongest momentum move of the entire cycle Wednesday on a short squeeze of the every same shorts who entered Monday and Tuesday. Again the larger point is the 5 min chart I had been waiting on as it is the one chart that must be divergence for me to consider any trade long or short, is now negative as seen yesterday along with the longer charts from 7 min out to monthly.

Transports underlying trade, one of the strongest performers even with higher oil prices yesterday (which tells us this had nothing to do with oil, but the larger head fake concept as transports are momentum names) is clearly failing them

 shorter term transports 2 min trend since accumulation leading to the 17th (F_O_M_C)

However this was never a move with the support price seemed to indicate it had, and rather a confirmed head fake move as the 10 min chart shows on the move with a stronger (because of increased volatility and that being a sign of a transition area) negative divegrence than the previous negatives sending it lower.

The Dow which has been an out-performer with its magnetic psychological move to $18k is also showing the same.

 It has largely been the short term charts we have been looking for a change in,  the timing or tactical charts like this DIA 1 min which a VERY clear divergence to push to $18k (DOW) and a deep negative divegrence since as 18k should have brought in longs on limit./confirmation orders, strengthening the bull trap which starts to trigger the further we drop below $18k.

 The intermediate 5 min chart with accumulation in to the 17th and a clear reversal and distribution in 3C.

However the longer term chart is where probabilities for shorter term resolution of moves like this reside, look at the divegrence in the 60 min DIA from point "A" to point "B". I don't think I need to draw the arrow showing the heavy distribution on the most recent move which is in addition to prior distribution at the previous pivot high.

 The SPY's 1 min intraday in line which started with a positive divegrence on yesterday's closing sell-off is a thin veneer concealing what's going on deeper in underlying trade.

 Even with the large transaction with 1174 trades in one second, 4 seconds before the market closed on the 18th, creating an illusory wall of bullishness, the 3 min chart reveals what is actually going on even in near term trade outside the thin veneer of the 1 min chart.

And as to the Crazy Ivan cycle (remember for simplicity's sake, I view the 2 head fakes of the Crazy Ivan as being the one below the IWM's 6 week range and the expected and forecasted one above as the 6 week range presented an easy head fake target and it already carries an 80+% probability even without such an obvious range of a head fake move before a reversal, the fact it was the IWM (widely watched) and that the range was so tight and so long (6 trading weeks) all just increased the probabilities of such an upside head fake move which is how our forecast started, not with actual objective evidence, but from our concepts and this one based in mass psychology of the market, then divergences like the white positive gave us the evidence to back up the theory and the current negative on a strong 15 min chart back up the rest of the Crazy Ivan (second head fake) forecast.

The first move in the Crazy Ivan was a momentum creating short squeeze trap, the real move was the head fake above the range,  now that is completed and confirmed as a head fake move as there's no confirmation, certainly no positive divegrence, but the expected distribution, the move is now complete and has accomplished the goals of setting up a bull trap. Remember it was just the week prior that the market saw the worst Dw performance in 3 years, that wasn't just random.

The Q's are probably the worst looking as far as underlying trade as shown the last 3 days.

 Intraday 1 min also accumulated at the closing lows and seeing intraday distribution today, probably having more to do with closing positions before the holiday, but...

 Since the accumulation below the range to the left, I don't think I need to point out the negative divegrence above the range.

As for the longer term trend which told us the probabilities of the resolution of this move before it even started and now confirm, I have just highlighted the divergence areas both positive and negative, you should be able to pick out the DIVERGENCES in 3C, and if you can't follow the direction of price and 3C at each area, it is important you can do this. However the most important point is the recent move and the lack of 3C support, in fact...WHAT KIND OF DIVERGENCE IS THIS?

And the IWM...

 The 1 min chart has been drifting with the IWM with a slight negative bias, but not as important as...

 IWM 3 min is pretty clear about what has happened since crossing above the range.

 The 5 min chart and remember to see the last IWM chart below of the range and remember the dates and these divergences.

This 60 min IWM chart shows the range and why it was so appealing with somewhere between -.10 and -.38% movement over 6 trading weeks, Note the head fake below and then above, a Crazy Ivan, but more importantly look at the 60 min divegrence, you can even pick out the positive below the range, but the position now relative to the position of 3C and price at the start of the range is all you really need to know about what's happening here.

Quickly the Index futures.

 While the 1 min ES is nearly perfectly in line, NQ and TF are showing something else going on.

NQ with a very sharp negative recently although negative all day.

TF doesn't need any commentary.

Remember it has been the short term charts, the timing charts we have been waiting on for signals.

The ES 5 min chart which has had the best 3C relative performance is finally breaking and sharply.

The 7 min charts like NQ above are already in position. What do I always say about these flat ranges and their apparent "Dull" looking trade? Beware of quiet markets, this is where the strongest underlying action is. 

"It's like the kids in the room next door being a little too quiet, you know they are up to something" and 3C shows that something quite clearly.

ES 15 min chart and as mentioned, from here we have a full house out to monthly charts, it was just the 5 min charts needed and they are now in position, thus the reason I say this move to the downside could come literally at any moment.

I'll try to add a few more charts and I'm finishing up UNG/UGAZ.

Happy Holidays

I can tell just how slow it must be on Wall Street just from how slow it is in my email box, maybe 5% of the usual volume of emails from just last Friday.

In any case, most of Europe is either closed today or closing early, which means Europe is closed right now with some uninspired trade.

US markets largely close at 1 p.m. for Equities, we'll likely be shutting down around then. COMEX closes at 12:30, NYMEX at 1:30, CME/CBOT at 1:15 for Equity futures, everything else at 1.

The USD as expected did fall of the $90 level gained yesterday after the 5% GDP print, the Yen as expected did gain and as a result the USD/JPY fell, but nothing too shaking.

USD/JPY falling overnight.

30 year Treasury futures are seeing continues 3C support which started yesterday as they were knocked on the GDP data and the F_E_D boxed in even tighter on interest rate hikes.

As for the other futures...

 All 1 min Index Futures look like this, dull, tight choppy range and no signals to speak of.

The 5 min charts finally do have negative signals through a good part of the week like NQ above.

 Or 5 min ES.

The harsher charts are the 7 min that are deeply leading negative, but from here it's a full house with negatives in 15, 30, 60 , 4 hour, day, weekly and even monthly.

 NQ 7 min

ES 15 min

ES 60 min is a perfect representation of underlying trade confirming the Crazy Ivan shakeout, positive at the break below the range, negative at the break above the range, both head fake moves.


As far as Data, Initial Claims were released this morning and came in 9k better than last at 280k, prior 289k on consensus of 290k. Continuing Claims with a 1 week lag were up +25k.

The EIA Petroleum status is released at 10:30 a.m. with tomorrow's EIaNat Gas released at 12 p,m, today, I'll be covering nat gas.

All markets are closed tomorrow.

We have a very ugly set of charts, I'm just not sure the junior vacuum tubes running today will amount to much, but our head fake/Crazy Ivan move is in and confirmed and by looking at price action this week, you can see the real momentum off the knee jerk since last  Wednesday has all but died this week as underlying trade has fallen apart, it's as if they are just trying to keep things pinned until traders retunrn to work after some extended holidays.

If I don't see you before, I wish you all very Happy Holidays!