UNG / Natural Gas Update

It has been about a month since the last UNG update and this one seems timely.

The trades that would be available would be a pullback/swing short, perhaps an ETF like DGAZ (3x leveraged inverse/short Natural Gas) and after that, on a trade set-up in which we confirm the probabilities of the pullback being accumulated (much like the BABA trade set-up), long UNG, UNG calls or UGAZ (3x leveraged long Natural gas) or Nat Gas futures.

Thursday morning at 10:30 a.m. we have the EIA Natural Gas Inventories which may be an interesting time to look at entries as the initial volatility will sometimes give us a better entry. I'll be setting price alerts and following up on UNG to try to determine the best probabilities for a trade/entry.

Lets take a look at the charts.

 4-day UNG chart shows a recent Hammer/Doji bullish reversal candle (second from the right) followed by a bullish candle on increasing volume after nearly the entire year of 2015 trading in a lateral range after breaking important support in Q4 of 2014.

 Our Custom X-Over Screen shows the 10 and 22 day price moving averages in yellow and blue respectively. I add two additional indicators to avoid the false signals or whipsaws that are so frequent among moving average systems.

In the middle window I have a custom indicator I created with a number of different conditions (yellow) and a 22-bar moving average applied to it (blue).

The bottom window is a standard Wilder's RSI (period 14/use Wilder's smoothing).

There was a confirmed SELL / SELL SHORT Signal at the 3 red boxes to the left of the chart as the 10-bar ma crossed below the 22 ma. The custom indicator in the middle window (yellow) crossed below the blue 22 bar ma and Wilder's RSI (you can substitute the Ultimate Oscillator for RSI) crossed below its mid-line (50). All 3 taken together give a signal and that signal doesn't change until all 3 change together.

For instance at the (3) red "X"s the 10-day price moving average crossed above the 22-day blue, in a normal ma crossover system this would have been a false signal or whiplash, however in this system it remained an open short signal as all 3 indicators need to signal. Although I didn't check RSI at each point, it doesn't matter as the custom indicator in the middle window didn't crossover its moving average any of those times.

We don't have an exact buy signal yet, although we have 2 of 3 signals and the 3rd is quickly moving in the right direction.

Here's a closer look...

Typically we could expect a pullback to either the yellow or blue moving average before a buy signal has been generated (when we are very close).

Once there's a buy signal, more often than not the first pullback will be to the 10-day yellow moving average with subsequent pullbacks in the trend pulling back to the deeper 22-bar/day moving average  (price).

Interestingly many of my indicators work together well. This is my Trend Channel which is the first custom indicator I won an award for. 

The Trend Channel is a self-adjusting channel that automatically adjusts to the volatility and character of the stock its applied to. Unlike the wild swings of Bollinger Bands and the inflexible Envelope Channel, the Trend Channel has no settings other than the timeframe you use it on, As mentioned, it automatically determines the "normal" volatility for an asset and then creates a channel with a multiple standard deviation around the mean, if price violates that standard deviation of the channel, we have a stop-out on a CLOSING BASIS,

As you can see above, once the Trend Channel is applied there's no close above the lowest point of the upper channel at the two "N"'s, but there is at the second to last candle from the right at the green "Y" as price CLOSES ABOOVE the LOWEST point of the upper channel for a short (it would be the highest point of the lower channel for a long).

The channel self-adjusts to changes in volatility in the stock as the trend matures and will almost always hold a normal consolidation without stopping out. While you'll never get out at the exact top using this channel, you will catch the meat of the trend without having to guess, "Is this far enough?" The channel will also continue to lock in gains every day so long as the trade is still in a trend.

Interestingly the Trend Channel just stopped out the downtrend of -41.70% just as the X-Over Screen is about to give a confirmed long signal.

The long term daily 3C chart for UNG shows a negative divergence at the chart's highs and confirmation as 3C follows price lower until 2015 in which the price trend changes from down to more lateral and 3C goes in to a leading positive divergence (exceptionally strong signal) indicating heavy accumulation of UNG through 2015.

The daily chart of Natural Gas Futures confirms the exact same thing even though it's slightly different than UNG...

NG (Natural Gas Futures 1-day show a 3C negative divergence and downside trend confirmation followed by accumulation/leading positive divergence in to 2015 with an exceptionally strong signal.

This 60 min 3C chart of UNG shows the details of the recent lift off the lows with a positive divergence.

At this point there doesn't seem to be a reasonable pullback entry in which we can enter UNG long as a pullback would give us a better entry, lower risk and the ability to confirm accumulation of a pullback which is a constructive pullback confirming the intent of smart money as they accumulate shares o the cheap.

The 30 min chart shows the same thing in UNG, a negative divergence and trend down with 3C confirmation at the green arrow and a leading positive divergence at thee white area with 3C uptrend confirmation at the second green arrow.

However, the intraday chart shows a negative divergence, not one with strong distribution, but rather one that looks more like a constructive pullback or consolidation is likely.

Looking at NG futures for confirmation...

 The 7 min NG futures show the same negative divergence, again not a strong distribution signal, just enough to turn Nat. gas to the downside in what I suspect will be a constructive pullback and offer us a chance to buy UNG or UGAZ (or calls) at a discounted price and lower risk as well as having the opportunity to verify the pullback is being accumulated as it should be.

The 5 min NG chart confirms the same.

Near term for those with high risk tolerance and the ability to get in and out of trades quickly, DGAZ 3x short natural gas could be played on a pullback for some extra gains or perhaps a quick Put position (UNG puts). However, the larger, higher probability trade is UNG long after it pulls back and gives us strong confirmation (UGAZ, UNG long or calls). This would be the longer term trending trade, but you could play both, first UNG short via puts or DGAZ followed by an entry after a constructive pullback in UNG/UGAZ long or Calls.