How to Trade Natural Gas, Crude Oil and Gold ETF Funds

How to trade hot commodities like natural gas, oil and gold? We should see big moves in the coming weeks as gas bottoms, and oil and gold breakout or breakdown. A lot of money is going to be exchanging hands quickly and the key is to be on the receiving end of things. Below are some charts showing where these commodities are trading.

How to Trade Gold – Weekly Chart

How I trade gold is relatively straight forward. I use a simple trading model which allows me to identify the down side risk for a potential gold trade. I also use the same model for trading oil, gas and silver.

Beyond finding good entry points, it is crucial to know when to take some profits off the table. The weekly gold chart clearly shows gold trading at a resistance level which means there are going to be more sellers than buyers, hence the reason it is called resistance.

To trade gold I enter with my low risk entry points and sell half my position once I reach a resistance level. Thursday for example gold moved up into this long term resistance level and then started to head south. We took some profits off the table before gold dipped in the late afternoon for a healthy gain. Taking profits is a must or you’ll simply hold onto winning positions until they eventually turn into a loser.

How to Trade Crude Oil – Weekly Chart

Trading crude oil is exciting because it moves much faster than gold. How to trade crude oil with low risk can be done by using my simple trading model which is a combination of indicators like momentum, support & resistance, volume, price patterns and media coverage. All these things combined allow for highly accurate trades with minimal down side risk.

Crude oil looks ready to make a big move. The odds are pointing to higher prices because oil has a multi month bullish price action and the falling US dollar helps increase the price of oil. I can see oil breakout and rally into the $95 per barrel level if things go that way in the coming weeks.

How to Trade Oil (USO Fund) – Weekly Chart

USO tracks similarly to the price of crude oil and it provides some great trades for both swing traders and day traders. I focus on trades that bounce off support with low downside risks, which occur on both the daily and weekly charts.

How to Trade Natural Gas – Weekly Chart

Natural gas is looking ready to bottom here. If you go back to the early 90’s the $2-3 range is a major support level. While I don’t generally try to pick bottoms, there are some signature price patterns and volume patterns that have proven to be very profitable for catching sharp bounces.

How to Trade Natural Gas – Daily Chart

The daily chart shows a perfect waterfall sell off with the price of natural gas dropping to a long term support level. This pattern combination shows panic selling which indicates a short term bottom is close.

The extreme panic selling and sharp decline in price, removes much of the down side risk. Scaling into a position over a few days, if the price continues to move lower, is important for this strategy to work its magic.

The black horizontal lines show my resistance levels for taking profits. If the price were to drop below $10 then I would exit the second half of the position to lock in the rest of the profit.

How to Trade Commodities Conclusion:

Trading commodities is very simple with all the ETFs and funds available. The energy funds like oil and gas have some issues with following the prices of their underlying commodity but I do not find it a problem with my style of trading.

I would really like to know the entire story about what is going on with the oil and nat gas funds which have crazy contango issues. Why do other commodity funds like GLD (gold bullion) and SLV (silver bullion) not have these issues? Why can’t they make a fund which follows oil and gas properly? All I know is that there are a lot of dishonest people in the financial industry taking honest hard working people's money.

Disclosure Policy: I currently own GLD and UNG funds.

Comments

[JGL:]

Good thread.
Unfortunately I have bought UNG at... $14.00. Not sure to take a loss or wait for winter!


On Sep 11 10:59 AM frn_scam wrote:

> Readers should be cautioned that, though "easy" to trade natural
> gas, it is just as easy to lose money on UNG as a vehicle for natural
> gas. This is especially so for long term UNG holders betting that
> today's record low prices will rise in time.
>
> As the author points out, there is contango in natural gas--extreme
> contango--which, coupled with UNG's policy of rolling only into the
> prompt month's futures contract, is a constant drag on UNG.
>
> Anybody considering a long term holding of UNG should dilligently
> study this issue in the Yahoo message board, which has a wealth of
> information and detail. As m_prince_54 there shows, the decay is
> brutal:
>
> "for every dollar of NG price, UNG was worth $4.71 at Jun 30 2008,
> $4.15 on Jan 2nd 2009, and is now worth $3.09 now "

Sep 12 10:37 AM

[Maxe Paul:]

WTF are you talking about? "near term terror attacks", "we have many stocks connected to the Pentagon"?

OMG, What, people actually give you their money for you to invest?




On Sep 12 10:33 AM KUWAIT CONNECT wrote:

> I think that near future terror attacks on US and Western Europe
> are inevitable, same as I think we are at the edge of major Middle
> East conflict or war, that's why my Middle East and other clients
> are fully protected from such events. Alltogether we are long about
> 230 stocks that you never heared of exist, but this is fully hedged
> with short index futures position where we don't look to profit now
> from this equities, we are going to make more from falling markets
> and at each lower level to reinvest profits from short futures to
> long equities and hedge this holdings again. We have many stocks
> connected with Pentagon.
> This is a description of only one trading strategy

Sep 12 11:26 AM

[Jeff Decker:]

Let's not forget that UNG carries the hybrid genetic traits of both parent markets, equity and commodity. Now with government restraints at the doorstep, it is trading much like a closed-end equity fund. Ironically, the supply of shares is limited (and probably trading at a 20% premium for that very reason) but the supply of the commodity seems limitless. There are way easier trades than this.

Sep 12 11:38 AM

[Doomdog:]

I would take a look at SJT, this USED to pay out .20+ per month. if gas goes up, the payout will improve.

Sep 12 12:10 PM

[User 320668:]

comapny right after the closing bell on Friday said it will create the new share from sep 28 and then UNG price fell 5% in after hour trading which means Permium almost vanished. From Monady UNG will be trade almost without permium or modest 2-3 % relative to NG future.

Sep 12 12:18 PM

[Biren Vakil:]

I strongly beleive- natural gas bear market is result of insider trading. CFTC has banned fresh issuance of Gas ETF. Thousands of US retail investors, traders, speculators and especially gullible small traders in India who trade natural gas in Indian MCX futures lost huge huge huge money. Handful of smart traders, bucket shop operators, book runners have made huge huge money.


On Sep 11 11:23 AM User 484875 wrote:

> im also long ung thru short puts
> but im very scared of the govt with all its pol correctness also
> pressuring this fund to close down like DXO for deutsche?
> does anyone konw if UNG will be closed down?
> all long term bets will be off if this fund closes down
> true there is a contango killing this fund yet its stil easier for
> a small spec to trade nat gas thru ung than the underlying and take
> delivery on the futures.

Sep 12 01:16 PM

[ACEMAN:]

Y'all need to look very carefully at what our Kuwati brothers are saying here. However, it won't be any outside event, but really an event that is already in motion, namely the fiat printing of money by the UST--actually a press of a button. But first amateurs and ordinary investors are going long when in fact they should emulate what the oil & gas boys are doing and that is shorting for Q4 and Q1 2010, and then when inflation begins the real Big Bang be prepared for a doubling in gas and oil to $85. The irony is that the Obama administration needs O & G prices to go up in order to collect taxes to cover the costs of the healthcare bill, the so-called cleaning up the inefficiencies with wind fall oil & gas profits. This will drive the dollar lower, China will make its settlements based on a basket of currencies including the Euro, GBP, Indonesia Ruppiah and Ozzie and NZ dollars. Now you got your forex play, as well. Well, now it's really time to contemplate that lovely bengiet on my plate with my coffee, NOLA style, laissez le bon temp roule.

Sep 12 01:42 PM

[Chris - Lon...:]

Not sure if I can agree completely with your GLD strategy. It worked when Gold's resistance was $1000. With the weakening dollar, threat of inflation, foreign economies buying assets with both hands and many other factors, we may see Gold's new support at 1k.

Sep 12 01:50 PM

[Mad Hedge F...:]

pup. Since I have had such a hot hand in natural gas, many have asked me to comment on yesterday’s surprise announcement that the ETF, UNG, finally got permission to issue new shares. The easy answer here is that UNG will crater. There is no reason for the fund to trade at a premium whatsoever, which at one point traded as high as 20%, an overvaluation you normally only see in closed end funds at bear market bottoms. These ETF’s are simply pass through vehicles which make it easier for investors to own NG in stock form when they are legally unable, or too lazy to open a futures trading account. They should never trade more than 1% out of line with the underlying to account for the admin and execution costs of running such an instrument. The people who made the killing here were the handful of hedge funds that were able to borrow UNG shares, sell them short, and go long the futures, locking in a guaranteed 20% spread. They will cash in their profit next week. Something similar is still going on where smart industry players have locked up salt caverns to store gas, buy it cheaply on the spot market, and sell it forward. This is possible because yesterday you could buy October at $3.25/MCF and sell it for April delivery at $5.32, giving you an annualized return of 127%. Leverage that, and you are talking about some serious money. If you were wondering where the money was coming from to buy those G5’s, this is it. The fundamentals for the industry are still terrible, and there is a risk that the market could completely grind to a halt when the country runs out of storage, so the volatility will remain huge. This week’s move explosive 44% move from $2.40 to $3.44 was nothing more than pure short covering. I expect a quick double in NG once the storage issue is resolved, and the cheapest, cleanest, and most liquid way to participate is though the futures. If you need help in how to do this, e-mail me at madhedgefundtrader@yah...

Sep 12 02:09 PM

[Northstar10000:]

There is one more wash out in oil and stocks before the really big move comes. the dollar is going to get stronger and then a sell will come shortly after that. don't hang out too long when it comes. Take your short profits and run for oil. Wait for the dollar rally set up it will give you a better entry point in oil. Huge put buying in Dec 50 oil puts.
It was no little guy order. Does not mean it has to go down to 50. It is a cheap directional trade even if it just gets into the 58 area fast.

Sep 12 04:49 PM

[H. T. Love:]

UNG will not be shutdown near-term. I'l have a new instablog or article later this evening.

HardToLove


On Sep 11 11:23 AM User 484875 wrote:

> im also long ung thru short puts
> but im very scared of the govt with all its pol correctness also
> pressuring this fund to close down like DXO for deutsche?
> does anyone konw if UNG will be closed down?
> all long term bets will be off if this fund closes down
> true there is a contango killing this fund yet its stil easier for
> a small spec to trade nat gas thru ung than the underlying and take
> delivery on the futures.

Sep 12 06:58 PM

[H. T. Love:]

I had this happen when Wachovia was going to get taken over. They dropped to effectively $0 in an instant.

HardToLove


On Sep 11 05:48 PM aba12345 wrote:

> If ung force to close, what would be happen to options ( either sell
> put or buy call...?

Sep 12 07:01 PM

[H. T. Love:]

Immediately sell some covered calls (to lower cost basis) or buy some puts (then you can excersize, cutting losses or take profits on the puts, lowering cost basis) or cut your losses by getting out. UNG is *only* investable, in my opinion, when it is in backwardation, or at least not in severe contango, like it is now. And it will not stay in backwardation long - so you still really need to treat it like a trade.

Even then, the only way to profit is to use options to gain on the price movements. It's current price reflects a premium of 16.12% (mkt $10.59) over NAV ($9.12). This premium *will* shortly approach or go to 0%.

Even if treating it as a trade (the only way to treat it if you want to be in it for now) you need to use options or be very nimbly in and out to profit. Plan your entr/exits and options actions with an eye to the roll periods (over 60% of the time there is a price drop during the period).

You can see the roll periods by browsing here
www.unitedstatesnatura.../

or check various instablogs, articles or comments I've posted.

HardToLove

On Sep 12 10:37 AM JGL wrote:

> Good thread.
> Unfortunately I have bought UNG at... $14.00. Not sure to take a
> loss or wait for winter!

Sep 12 07:17 PM

[H. T. Love:]

On Sep 12 01:16 PM Biren Vakil wrote:

> I strongly beleive- natural gas bear market is result of insider
> trading. CFTC has banned fresh issuance of Gas ETF. <snip>

Mis-information.

HardToLove

Sep 12 07:20 PM

[Gigem77:]

UNG is issuing more shares per their late Friday announcement. Their share price fell to 10 bucks in the after hours. The 2-3 day short covering rally is over. The spot natgas price at the Henry Hub went below 2 bucks last week, rallied a bit this week and then dropped Friday. It will be below 2 again soon.
The UNG rollover process takes about 4 days during the last 2 weeks of the contract. The October contract terminates in 2 weeks on the 25th. They will close roughly 20% of the front month futures contracts. Who will buy? Storage is already over 90% full with another 10-12 weeks left in the injection season. Demand in September is the lowest of the year.

Sep 12 08:44 PM

[bricki:]

Nat Gas is worthless in the sense that the real value of it is not understood by the managers of the resource in the places that you describe. It is a real shame and in the future the waste will appall people.

In the overall scheme of things Nat Gas is one of the most valuable resources there is - for production of fertilizer, as a feedstock for chemical production and as the cleanest of the petrochemicals as an energy source. Of all the things man uses it is perhaps the most fundamental resource needed for the sustenance of modern civilization.

The basic nature of the chemistry of the planet we live on makes this inevitable.

I think it is very unlikely we will see Nat Gas prices like this again. These prices will drive more and more use in a variety of creative ways.

If you are a longer term investor the only question is how to take advantage of this generational opportunity most efficiently.

On Sep 12 09:47 AM MexCom wrote:

> In actuality, Nat. Gas is a worthless commodity in itself. Much
> is flared off as a bi-product from oil production in many parts of
> the world like Russia and Africa. It only has value as a fuel if
> pipeline infrastructure is provided with capital intensive investment.

Sep 12 11:47 PM

[User 462065:]

I thought Nat Gas was mainly used for power plant...


On Sep 12 11:47 PM bricki wrote:

> Nat Gas is worthless in the sense that the real value of it is not
> understood by the managers of the resource in the places that you
> describe. It is a real shame and in the future the waste will appall
> people.
>
> In the overall scheme of things Nat Gas is one of the most valuable
> resources there is - for production of fertilizer, as a feedstock
> for chemical production and as the cleanest of the petrochemicals
> as an energy source. Of all the things man uses it is perhaps the
> most fundamental resource needed for the sustenance of modern civilization.
>
>
> The basic nature of the chemistry of the planet we live on makes
> this inevitable.
>
> I think it is very unlikely we will see Nat Gas prices like this
> again. These prices will drive more and more use in a variety of
> creative ways.
>
> If you are a longer term investor the only question is how to take
> advantage of this generational opportunity most efficiently.
>
> On Sep 12 09:47 AM MexCom wrote:

Sep 13 05:19 AM

[H. T. Love:]

On Sep 13 05:19 AM User 462065 wrote:

> I thought Nat Gas was mainly used for power plant...

Using EIA reported consumption just Oct '07 - Sep -8 monthy averages as a basis:

Lse/Plt Fuel 5.48%
PipeLn/Dist 2.70%
Residential, 20.51%
Commercial 13.20%
Industrial 28.94%
Veh. Fuel 0.12%
Elec. Gen. 29.04%

HardToLove

Sep 13 06:39 AM

[daniel3582:]

Here's a tip on how to trade commodity ETFs... don't. The people making the most profits on these ETFs are commodities futures traders... who are taking your money. Also, the ETF administrators... who are taking your money.

Get a brokerage that allows you to buy the futures outright.

Sep 13 09:03 AM

[MexCom:]

If the price is zero today and zero tomorrow at the well head - the decision to incur storage cost yesterday was bad. You should have waited a day later. During Winter the price will rise and most of the supply, if not all, will be taken from the pipelines. Again, no cash market reason to store it. Storage at best is a time lag game with the hopes of a cold Winter. Either you will be right or wrong with little wiggle room. Only those who can absorb a complete loss should play this one.


On Sep 12 02:09 PM Mad Hedge Fund Trader wrote:

> pup. Since I have had such a hot hand in natural gas, many have asked
> me to comment on yesterday’s surprise announcement that the ETF,
> UNG, finally got permission to issue new shares. The easy answer
> here is that UNG will crater. There is no reason for the fund to
> trade at a premium whatsoever, which at one point traded as high
> as 20%, an overvaluation you normally only see in closed end funds
> at bear market bottoms. These ETF’s are simply pass through vehicles
> which make it easier for investors to own NG in stock form when they
> are legally unable, or too lazy to open a futures trading account.
> They should never trade more than 1% out of line with the underlying
> to account for the admin and execution costs of running such an instrument.
> The people who made the killing here were the handful of hedge funds
> that were able to borrow UNG shares, sell them short, and go long
> the futures, locking in a guaranteed 20% spread. They will cash in
> their profit next week. Something similar is still going on where
> smart industry players have locked up salt caverns to store gas,
> buy it cheaply on the spot market, and sell it forward. This is possible
> because yesterday you could buy October at $3.25/MCF and sell it
> for April delivery at $5.32, giving you an annualized return of 127%.
> Leverage that, and you are talking about some serious money. If you
> were wondering where the money was coming from to buy those G5’s,
> this is it. The fundamentals for the industry are still terrible,
> and there is a risk that the market could completely grind to a halt
> when the country runs out of storage, so the volatility will remain
> huge. This week’s move explosive 44% move from $2.40 to $3.44 was
> nothing more than pure short covering. I expect a quick double in
> NG once the storage issue is resolved, and the cheapest, cleanest,
> and most liquid way to participate is though the futures. If you
> need help in how to do this, e-mail me at madhedgefundtrader@yah...

Sep 13 12:48 PM