Unnatural Gas: Postmarket Update 9/17/09

I went short natural gas today via UNG.  Want to smack me in the face, tell me I’m an idiot, that it’s just too cheap, that it can’t go down anymore.  Bahh, I’m sick of that crap.  The only person who I know that has actually made money in UNG over the past few months is @stevenplace, and he did it with options, not the common, and the trade wasn’t even directional!  You can find a post he wrote on his trade here, please take the time to read it.

There are many issues surrounding the structure of UNG that work against the price.  They are numerous, and frankly I don’t care to take the time in hashing them out here.  I will though, go through the technicals with a few charts and give you my thinking behind the trade.

UNG gave me a sell signal on August 19th when it broke through 11.92.  I stared at the screen, trying to push the sell button.  @stein, my friend and colleague at StockTwits who was sitting right next to me, was thinking about buying puts as well.  We sat there, and sat there, and then talked ourselves out of the trade.  We both knew it was the right trade, and my strategy is especially designed to profit from momentum on both sides in commodities.  Of course UNG gave it up big time, and in a hurry, the puts would have been worth a fortune.  My trade however would have broken about even today after giving up huge gains.  The upper 20 day Donchian Channel sits at 12.25 as of today, which means that had I taken the original trade, I would still be in, but my risk would be greatly reduced.

So as UNG came back to where I should have entered in August, I took the short entry.  In terms of my strategy, it’s the same trade I should have made back then, except I haven’t had to hold the short, and my risk is greatly reduced.  I will stop out on that upper 20 day band if it goes through.  I like this trade though for several reasons.

The long term downtrend in UNG is still intact and technically it is coming up against huge resistance where the bottom fell out in August.  Also, notice the times that UNG tried to break above its 50 day exponential moving average.  Each time it tested from above and failed.  Don’t get long this issue until it has a successful test there and holds for a few days.

Let’s take a closer look at an hourly chart.  We came right up to resistance today and were smacked back down.  If UNG breaks through that resistance we are pretty much out of this trade.  The action off the bottom felt like short covering followed by momentum players.  I don’t see a lot of support anywhere below the 5 day moving average, this thing could whipsaw back down faster than buyers will be able to say uncle.

Look, follow me into the short trade at your own discretion, but please don’t by UNG until it breaks over 12 and has a successful test of the 50 day moving average from the top side.  I know there are value players out there who may be correct in the long term, but when you deal with commodities momentum rules all.  I like the short side here, especially as some protection if the dollar gets its shit together and smacks the energy complex down.

Ok, as for other market goings on.  The VWAP bots were at it again today, it looked as if late day profit takers from the recent run were going to push us down into the close, but alas, high frequency trading rules all these days and the bots shot us back up towards VWAP and even.  We closed down marginally on the SPY.

My long book didn’t look so hot today with KG, TTWO, and MBT taking a whack.  HUN, SNHY, and CF had nice days.  I expect some consolidation to happen over the next few days while the market catches its breath.  We can do that in one of two ways, over price or time.  I feel it will be time, after which we will push to close the SPY gap from last October at 110.  After that, I’ve got no clue.

The semiconductors continue to run headlong into a lot of resistance.  SMH has stalled out, if you are playing on a 5 day to one month time frame to the long side don’t be there, put your money in better places.

The only other point of of note is the action in the USDCAD cross.  The Loonie broke resistance today and had the market spiking early this morning on a very weak dollar.  It then traded back down and pivoted around the number all day.  I highlighted the long term picture in this cross in the Chart.ly Chart of the Day, a daily blog post the I write for StockTwits, check it out.

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