Wednesday, December 23, 2009

"How to Enter Natural Gas With Resistance So Close" UNG

From Minyanville:

Chart of the Day: Natural Gas Futures (@NG)

Click to enlarge

  • It’s hard to believe it has been more than two weeks since I last highlighted natural gas. At that time, I recommended buying on a breakout above $5.30. The commodity has since approached $6 and now resides more than 6% above the breakout level.

  • The problem now is that natural gas is wrestling with important resistance at a downtrend line in place since May.

  • My best guess is that if natural gas futures are going to break the downtrend and continue higher, it will only happen after a pullback to short-term support to “re-fuel” and gather some more strength. Given that scenario, I'd advise those who want to buy natural gas to only consider entering long positions in natural gas futures or related holdings on a pullback to the previous breakout level of $5.30 on the futures.

  • One big problem I see for natural gas is the “bearish reversal” pattern that may be developing. That is where the RSI is making higher highs even as the price of the underlying security/contract is making lower highs. The resolution of a “bearish reversal” pattern typically results in new lows in price that correspond approximately in magnitude to the lower peak that was made in the pattern setup. In this case, a new low price print of $4.14 would be the resolution of the “bearish reversal” pattern.

Strategy: Given that resistance for natural gas is so close and the loss potential for a short position is identifiable and relatively small, I'd rather enter short sales against natural gas and related holdings here with tight stops in place on any close above the downtrend line resistance.