Nat Gas in interesting, One of my colleagues from school exposed me to the world of nat gas and ETF trading.
Current Fundamentals that can be considered:
Nat gas is a cyclical so depending on season nat gas is either more expensive or less expensive. In winter they burn a lot inventory for heating so over the spring and summer the US stores more nat gas for the upcoming winter. Looking back, usually end of spring / beginning of summer nat gas begins to climb. However, in the summer time, nat gas is used for peak energy demand which usually occurs when heat waves have occurred. Currently last week and this week we have had pretty hot weather in the major east coast cities in the states.
On Thursdays at 10:30am, there is a report that provides inventory data for nat gas in the states. This report sometimes has a dramatic impact on the price. Two Thursday's ago the inventory data was on the low end of the expected values. Last Thursday, the report came in below expectations. This week has been quite hot as well. Therefore from the stand point of saying that they have to fill inventories by winter, there is therefore more demand for the commodity so the price should be trending higher.
One thing to note as well, is with the development of more shale gas deposited, there is or will be increasing supply in the medium to long term so that might downside pressure on the commodity.
Now lets see how the fundamentals line up with the technicals
A bit of background, the ETF that is shown is 2x leverage of the underlying nat gas futures. There is some strange things with ETFs, that I will not go into now, but just note that over time this ETF lose value due to a reshuffling between HNU and HND (the inverse 2x leverage of nat gas futures). So the ETF is designed to reflect the intra-day price fluctuations in the future contract of nat gas.
Anyways, this ETF has been trading between 4.86 to 6.43 since late March. It has recent broke out and retested that 6.43 support twice and on the third time broke through it, but quickly bounced above the 6.43 mark. From the Dow video you can notice this was a head and shoulders pattern that broke its neckline but then the past couple of days closed above the next line. This is a Failed Head and Shoulders pattern. And it is the reason why you need to set your stop loss a couple of cents above the neck line. In this case if you were shorting this ETF (which you wouldn't since there is HND which would go up if the nat gas future went down) you would have made a decent trade but if you ignored the fundamentals of weather which you probably shouldn't do for a commodity.
a) Elliott wave Theory
I am 100% new to Elliott wave theory so I will not pretend to know what I am talking about. I labeled this as a 1-5 wave with a ABC correction. This could make sense but again I don't know enough to say this has any bearing on if the trend that 1-5 wave was in (bullish) will continue after the ABC pattern.
b) Trading Channel
Since Nat Gas traded in a channel for a few months, breaking out of that channel to the upside is considered bullish. The 6.43 level is very strong support now. This is why your stop loss should be at this level, because if this is broken you are out of position and it is better to exit and re-evaluate. The best part about this is that the current price is relatively close to the stop loss price making this a less risky trade. This level is also around the neckline area, but since the H&S pattern was broken it no longer has any bearing on the outcome.
c) Volume
The volume is quite bearish, there has been a lot of downward pressure, and the most recent volume is lower than the previous days by a large percentage.
d) MACD
This indicator is saying that the momentum is bearish, but if you look at the light blue line the slope has flattened out completely. While the trigger line is continuing its decline. This means they may be crossing in the short term which would indicate a BUY signal.
c) Slow Stoch
There has been a cross over and possibility a change in momentum of the stock. Notice that it was over sold a few days ago but has come out of that now. Since it isn't over sold it could continue to sell off but it will be over sold and a bounce could be expected. I would consider this a neutral to bullish indicator.
d) Moving averages
As mentioned above ETFs lose value over time, so MA might not be perfect but still shorter term MA still hold weight. An example of this is the 50 day MA. It has been strong resistance in the past and solid support for the last retest which helped propel this ETF over the neckline. Also notice that the 50 day MA is starting to increase (positive slope). This would be considered bullish since we have the 50 as good support below the current price. The 20 day MA is overhead resistance, and therefore part of the risk of this trade. It could be argued that it was resistance recently.
e) Fibs
They match up pretty well as they are drawn, so i only see the 61.8% being potential resistances.
The Trade
Entry:
Waiting for a pull back to entry a long position. It is foreseeable that there will be a pull back from the recent climb possibly to retest that 6.43 level. If it bounces the price should be on its way up.
Exit:
Stop loss: below that 6.43 level, day 6.45-6.48. I don't have a good method to pick precise stop loss target.
Target: 7.41 I have labeled at a target. This is aggressive but not out of reach. The problems I see are the 20 day MA overhead need to be broken and the 61.8% retractment. The 7.41 level was the resistance on the left shoulder and support on the head so it could be a good level to see a bounce so better exit the position and re-evaluate.
Caveat:
I am very reluctant to enter this trade. The main reason is not that some indicators are bearish, i think there is a very strong argument technically and fundamentally that the price should go higher but it is the overall market sediment. As mentioned in the DOW posting early, the markets are at a pivot point where a large crash is likely until we fail the H&S pattern. As Nat Gas is in the energy sector, and the energy sector usually takes a hit during a downturn since there is less demand for energy, if this down turn happens this week say Thursday, this could be an external factor that would drag Nat Gas down even though it is poised to start to climb. So I am still undecided about this trade. But it is relatively low risk since the stop loss is quite close to the current price. Ideally, I would like to see Tuesday be a pull back in nat gas, and a 3-4 day consolidation for the markets (there is a bounce expected relatively soon). This would give me an entry point into nat gas at a good price, and Thursday exit from the position before any major market moves occur.
Update 1 - June 6th
I did not take this trade today, I am happy I was busy for the second half of the day because I might have reconsidered entry the trade late in the day when the Nat Gas market dropped like a rock. The close however was below my target for stop loss. Therefore if I was long this position I would have already gave up and pulled out of this trade. This is a significant trading close, since it places HNU (the nat gas derivative) back into the trading channel it as been stuck in for over 3-4 months. Therefore the resistance that was broke was very strong. There is still a strong case to be made that the weather has been so hot that the nat gas inventories numbers will be well under the expected values. However, I am not confident that this will happen and therefore will not be taking a nat gas trade. Another reasoning is that the ETF is not oversold and still has the ability to break down further and the MACD is still bearish. The Volume on todays drop was also relatively high vs the previous 7-8 closes. I will update this on Friday after the nat gas closes after Thursday's announcement.
Update 2:
Nat gas..... My reasoning for my apprehension was confirmed today. Even though the fundamentals pointed to a possible spike in costs due to the weather what happened in the charts?
On June 7th we had a continued breakdown of Nat Gas prices which would have confirmed the breaking of that support line. This now means that nat gas is now back into the trading channel it was for almost 2-3 months earlier this year. Until it gets above the purple line it it wouldn't make sense to be going long (unless you are trading inter-day).
Today, June 8th, big announcement and nat gas prices dropped. Slicing through that 50 day moving average without any resistance. The numbers were better than expectations! This could have been a coincidence but this is a case where technical analysis predicted fundamentals.
Lets look at where HNU stands now. The trading channel is approx $4.86 to $6.43 and the price stands at $5.65 at close.
First, HNU is in an oversold condition which usually indicates a bounce or sideways action so i would be surprised to see a continued all out drop to test the $4.86 support. However! researching more into slow stochastics there is some people that talk about embedded conditions. Where if the condition remains below 20 (both the lines) then they are embedded and should be looked at as a lock in of a trend. I need to do more research on this but as of now, i would say it isn't looking good. Another thing to notice is the above average volume. Over the past couple of months this has rarely occurred.
MACD line and its signal line are diverging so that would again be bearish for this ETF.
The breaking of the 50 day moving average is also very bearish. My position on this changed as soon as HNU closed below that strong $6.43 support. If I was more confident with this analysis i would have went short and made a bundle but the weather and other factors such as increasing energy prices and a pop in the economy remained at odds with the technical analysis. Therefore, I didn't touch this trade with a 50' pole.
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