Tuesday, March 2, 2010

UNG - Dead Cat Bounce Or Worse?

I ususally avoid the politics and some of the more detailed nuances surrounding the UNG trade for good reasons. 1) The forward contracts for UNG that drive price movements, and if a contango scenario exists that can not be overcome nothing good will come of it (see chart below) 2) Politics are brutal and the manipulation of pricing is possible and unfair (based on the stronger pull in Washington). 3) Supply/Demand reality versus fictional truths. 4) There is so much Natgas in the earth scarcity will never be an issue thus keeping prices low.

Here is the most recent Weekly Update from EIA. If you believe the EIA numbers (I don't), you can find all the governments info on Natgas HERE. I also suggest that you learn more about UNG HERE, cause you need to understand the nuances of the ETF before you invest. I think the "roll dates" are very important, and you can learn more about them HERE. My favorite disclaimer from the site, " These risks could result in large fluctuations in the price of UNG’s units. An investor could lose all or substantially all of his/her investment." I think those unfortunate ones that bout it in the $60's agree with that statement.

I know one thing, I believe that Natgas is a large part of America's energy independence and can provide a more earth friendly option to the other two in many cases. Sadly big oil and coal are not ready to allow the new comer into the game. A post by Madhedgefundtrader on Zero Hedge Coal Lobbyists Are Taking a Hatchet to the Natural Gas Industry drives some of these point home. "Their mission is to render toothless Cap & Trade legislation, block subsidies for natural gas which both parties seem to agree on, dilute environmental legislation, and promote the myth that the whole global warming thing is nothing more than a leftist hoax, thus keeping hands off King Coal."

So you have Natgas fighting an uphill battle on multiple fronts. I think that price proves these points. I do not see demand growing for Natgas in the near future. If anything I see if being flat to down based purely on my economic assumption that things are gonna stink for a long time as this depression draws out or enters what I think will be a double dip. I have read forecasts that see the price of Natgas going back to test the $2.40 lowas seen last August (UNG IS dead cat bouncing - /NG has a long way to go yet).

Looking at a chart comparing Natgas and Oil - Natgas re-entered the LT channel up after the drastic fall and is now backtesting the lower channel line. Will it find support here or will it revisit the $2.62 level? The indicators on this monthly chart don't look healthy. RSI is trending down. MACD hist is flat. S Sto and CCI appear to be rolling over as well. Yes, there could be some more pop in this corrective according to the charts, but I don't see it. The main thing you need to notice is the LT relationship to the price of oil. Will that correct and how will it correct? I think oil is coming down to meet NG.  

Comparing Natgas to UNG this chart shows another glaring gap. OK, so what happened to UNG as compared to Oil and Natgas. Why the heck did it not rise like it was supposed to with the other two? Shouldn't it catch up? Well you see there was a massive contango issue. The spot price was near $2 and the Futures were near $5 and, kapow, UNG got hosed. Equilibrium did not make it that month. The spot price only got up to near $3 and that was all she wrote. Now it trades in backwardation where the futures are less than the spot now. No, it should not catch up theoretically. Give UNG a call and speak to an analyst if you like. They are there to help if you need it.

So, what technically does UNG have in store? Here is a daily chart of UNG. Double bottom, check! Falling wedge, check! At a NT support line, check! Indicators on the 30 and 60m with divergences, check! Daily indicators oversold, check! That is a lot of checks! I see near term oversold conditions that should lead to a pop, but not a big one. $9.50 max at this time is all I am willing to go. I also expect more downside. See the box with the ? in it? I first introduced that box in my UNG Popping post back on December 17th (I'll be adjusting it after this post). In that post I also gave you the "watch for hist to turn" note on the MACD hist as a good topping point. Not bad if you ask me. I suggest you look at my weekly UNG chart here and take a good look at the 20ma ($9.74 now) that has been acting like a lid on price. So, after we get some sort of correction that should begin in the next week or so, look for more weakness.

Sorry, but my bearish stance on UNG continues (and it will remain for probably another year if not longer - barring inflation). Bottom line is over supply and horrible economic conditions should dominate the market for the foreseeable future. Don't be fooled by short term pops in the economy. Sure NG may get a pop from all the heating going on in the NE right now, but with 30% usage from consumers and the other 70% from manufacturing and production do you think it will be meaningful? Winter is ending. They have shut down extraction facilities and supply is still near capacity. When the economy truly begins to recover (LOL, my regular readers know how I feel about that) so will UNG. Those hoping for a 6 handle on UNG again can fhugeddaboutit unless we have a hyperinflationary situation that drives commodities thru the roof (I give this a good probability down the road). Those looking for a NT pop, be patient it will come soon. $9.50 target.

Watch the 60m chart and look for price to crack the 20ma and for the RSI's to crack the downtrend lines. I'd also look for some sort of reversal candle on the daily chart. Keep those stops tight and let the trade come to you.