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Stock, Options, ETF and Commodities Investor; My educational background is in Computer Science and Accounting with significant entrepreneurial and Fortune 100 Corporate experience in Information Management and Technology services in industries including: Consulting, Oil and Gas, Manufacturing,... More
  • DGAZ Trade Target 12 comments
    Jan 31, 2014 11:08 AM | about stocks: UGAZ, DGAZ

    This article will depict my current view and analysis on Natural Gas and the DGAZ 3x Inverse ETF on the S&P Natural Gas Index.

    I have been accumulating shares into a position and now we are seeing some of the downside in Natural Gas an upside in DGAZ that I have been looking for. There is still risk of upside runs as Natural Gas makes the turn, but on the whole, my view is for lower highs and lower lows as Natural Gas and DGAZ return to their norms.

    In the 1 year DGAZ chart below, I have overlaid with a comparison to UGAZ the 3x long ETF on Natural Gas. There are a few things I would like to point out that are key to my thesis for investment in DGAZ and how I believe this position will play out.

    (click to enlarge)

    1) You will notice that DGAZ always touches and crosses back over UGAZ following a wide spread where Natural Gas prices rise, peak and return to the norm. It is a consistent cycle.

    2) The flat horizontal lines reflect the target zone where I plan to sell my position (unless something unforeseen alters my thesis and I have to adjust). This target zone is between $14 and $16 per unit. One thing I have noted is that at the point of crossover, these have been slightly lower each time, so I will adjust my sell target to $14 to $15, which is in the middle of the zone.

    3) This morning, we hit new lows that were below the prior low from the 1st big rally up in UGAZ - see the highlighted area. To me, this was key support for these high >5 price areas in Natural Gas and tells me we are going lower and without another severe winter storm, we won't see these prices likely again in Natural Gas in this cycle. Dynamics and weather to be watched, or for mis-information from sources that may have an interest in trying to get back to these prices to exit positions.

    While writing this, Natural gas is now trading at about 4.76. Based on a view of the recent Natural Gas chart, there is support at 4.7 that if we break below this, then we should have some more free falling opportunity in Natural Gas and upwards movement in DGAZ.

    From the chart, we could drop from 4.7 to 4.4 pretty quickly, the next level of support. At one of these support points, I would expect to see the bulls work to mount a rally. I could be wrong, but after all the technical damage done to the bulls, I would not expect more than about a .3 to .4 move and that move to stall and fail, only to take us to new lows from these recent levels. We may even begin to see 3.x levels in Natural Gas if the current milder weather patterns continue and we begin to hear of planned Natural Gas injections to storage to begin to replenish to historical levels.

    Disclosure: I am long DGAZ.

    Additional disclosure: My long position consists of what I consider core units and trading units. I may trade in and out of the trading units if I sense we will have some bull runs in Natural Gas/UGAZ. I may also buy or sell call or put options on BOIL and KOLD (2x leveraged Natural Gas ETF's) that do offer options, as UGAZ and DGAZ do not have options.

    Stocks: UGAZ, DGAZ
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Comments (12)
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  • Robert Edwards
    , contributor
    Comments (587) | Send Message
     
    Good article Grow. The key area for now is $4.70 in March NG, just like you mentioned. And I agree that if that fails then $4.40 should likely stop the fall again. The interesting part will be to see how high NG can bounce back to. I am thinking the top is already in, but maybe March NG gets back to 5.00 to 5.20 area.
    31 Jan 2014, 11:21 AM Reply Like
  • Growfast
    , contributor
    Comments (295) | Send Message
     
    Author’s reply » Thanks, RE. I could certainly be wrong about how high NG could run if enough bulls get on the train again. But, considering the severity of these last couple of storms and the shape of the spike, without another compelling event, it is difficult for me to see this happening - but I have certainly been wrong before.

     

    Another thing to watch is, that DGAZ has run low in this spread, so, will be interesting to see if it, as NUGT did while we made the turn in Gold, will gain back some of the leaked value - which at this point, my theory is that it will. TBD. If it won't recover that value, I may have to lower my target to where it appears UGAZ and DGAZ will cross again.
    31 Jan 2014, 11:25 AM Reply Like
  • Robert Edwards
    , contributor
    Comments (587) | Send Message
     
    If Nat Gas saw its high, we topped around $5.50 in March Nat Gas and DGAZ bottomed just under $3.30. If Nat gas fell to $3.50, then that makes a drop of 36%. If you triple that, then you get 108% gain in DGAZ, which makes $6.86 your target in DGAZ. DGAZ may never see $7 again but could come close. Plug in different trade parameters and see what you get. With this much strength in Nat Gas recently, I don't think we easily get under $3.50 for awhile.

     

    With Nat Gas having corrected significantly, anyone losing a ton on DGAZ from buying in too soon would be encouraged to start scaling into UGAZ which can be sold at a profit on the retest of the highs in Nat Gas. Another spike higher than what we have seen, such as a move to $6.00, would be devastating to DGAZ long-term holders as DGAZ could fall to $1.75. Then from $1.75, the rally of 100% or 200% from $1.75 will not get one back to a value a long-term bull will be happy with.
    If holding long-term, it becomes quickly obvious and in fact, it is imperative that one trade around their position to reduce the break even price. Sure, it might go up without you if you don't sell at the right time, but you probably have no choice but to make the attempt. You are better off day trading and messing up, than doing nothing and succeeding in losing all your capital due to slippage.
    31 Jan 2014, 12:07 PM Reply Like
  • Growfast
    , contributor
    Comments (295) | Send Message
     
    Author’s reply » Thanks for sharing your thoughts here. Certainly will be watching the dynamics and evaluating moves to make to adjust positions.
    31 Jan 2014, 06:40 PM Reply Like
  • Growfast
    , contributor
    Comments (295) | Send Message
     
    Author’s reply » RE - I've gone back to do analysis and I'm sticking with my 14 to 15 target. The power of the 3x leveraged ETF's once on the trend is greater than what you calculate and this is what folks miss. If you are betting on an uptrend and the trend goes down, slippage tanks a position quickly. But, when the trend is your friend, these things scale in a terrific way.

     

    Note in reference to the DGAZ/UGAZ overlay chart above at the widest point of the spread and then the crossover and peak in DGAZ the following:

     

    5/1/13 (The low in DGAZ) - NG price: 4.05; DGAZ: 8.56
    8/8/13 (The high in DGAZ) - NG price: 3.215; DGAZ: 20.52

     

    Notice that NG price moved roughly 20-21% and DGAZ yielded a 240% return! This chart pattern repeats itself in History.

     

    By comparison, we have also seen the move in NUGT to the upside with the turn in Gold, run higher per price of Gold as on the way down, the slippage was discussed but we have more than made that up. Sticking with my targets.
    31 Jan 2014, 06:59 PM Reply Like
  • Robert Edwards
    , contributor
    Comments (587) | Send Message
     
    Grow, it is true that I was too conservative on my estimates of how much DGAZ can bounce once it bottoms. I use my more conservative estimates because I want to make sure I cover the worst case scenario.

     

    If Nat Gas sells off 10% in a single day, DGAZ will rally 30% in a single day. But if Nat Gas falls 1% for a day, and continues this 1% gain pattern for 10% days, DGAZ will go up 3% per day, compounded, so instead of rallying 30%, now it rallies 34.4%. On the way down one deals with slippage but on the way back up one benefits from daily positive compounding. Every up day there is no slippage, only positive compounding. With up days greatly outnumbering the down days, one can achieve higher prices than what was describing.

     

    A more balanced approach might be to pick a price somewhere between our two approaches.
    1 Feb 2014, 10:21 AM Reply Like
  • Growfast
    , contributor
    Comments (295) | Send Message
     
    Author’s reply » Based on some of the discussion above, I realize it is a good idea to perform some additional analysis, explore assumptions in the thesis and to explore risk management associated with positions in DGAZ.

     

    RE has some good points and provokes more thought on this. What if NG goes to $6? If so, what would the price of DGAZ go to? And, would DGAZ revert to the mean if it does get knocked down to $1? What if the NG price doesn't return to the mean? I will explore some of this and more in another article, along with some additional analysis from prior cycles to test and drive more learning.
    1 Feb 2014, 09:39 AM Reply Like
  • Growfast
    , contributor
    Comments (295) | Send Message
     
    Author’s reply » See new Risk Analysis article on DGAZ associated with this thesis - posted here: http://seekingalpha.co...
    1 Feb 2014, 01:48 PM Reply Like
  • User 14703482
    , contributor
    Comment (1) | Send Message
     
    Growfast,

     

    I know much has change in your crossover opinion since this was written, but could you speculate on the DGAZ/UGAZ approx. crossover.
    Thanks
    28 Feb 2014, 12:56 AM Reply Like
  • Growfast
    , contributor
    Comments (295) | Send Message
     
    Author’s reply » My best guess now is that we should see 7 to 8. If fundamentals really go our way, and prices of NG do return to 3.4 to 3.6 range, we may turn out to see 10 to 12. Considering all we have been through with this winter, storage withdrawals, production interruptions and required recovery now, I'm less certain of the probability we will get to these levels - but we will see and I'm hoping we will. In the meantime, working to profit from the volatility where possible.
    28 Feb 2014, 08:37 AM Reply Like
  • MagicQuote2014
    , contributor
    Comments (76) | Send Message
     
    To Growfast and Robert Edwards:
    Please let me know if you read my comment here and if you want to collaborate. I have read your thread and a little of Robert's contributions, which I find interesting. If you decide yes, then I suggest Growfast contact me, and move communication off site.
    There are other projects I am involved in, but this one interests me. Growfast's diligence is evident . I respect what I have seen about your work ethic and patience with other contributors on this site. The DGAZ:UGAZ convergence/divergence came to my attention last week by other means, and I found Growfast's comments on SeekingAlpha the most interesting after $NATGAS statisfical instability came to my attention last week (see previous comments).
    ________
    There are no certainties. There are opportunities which one can observe carefully and participate in. This is the only situation that I am willing able to participate in at this time.If you reply.
    1. Please advise as to the identity of the NG price vehicles you are using as the main correlates with DGAZ and UGAZ. In order to introduce a more precise user interface trading module,I have Questions: Is it $NatGas(EOD)CME spot price. (fyi,there are no intra-day charts available to me on my platform). Please answer.
    FYII would need one that offers intraday real time information on the actual price of NatGas during the day, not just Prosearch derivatives or for instand $UNG:( if you have one other than Boil or Kool, as those are simply derivatives as well).
    As I have indicated in previous notes to Growfast's DGAZ's thread , I have combinations of algorithms and formulas which I privately utilize to identify and trade opportunities on occasions.
    Best of Luck.
    Friday, Feb. 28. MQ
    1 Mar 2014, 05:04 AM Reply Like
  • Growfast
    , contributor
    Comments (295) | Send Message
     
    Author’s reply » MQ,

     

    I have read your post and will contact you by message. DGAZ tracks against the S&P GCSI Natural Gas Index - and there is loads of documentation on the methodology for that index. But, for the most part, the index tracks to the appropriate monthly NG contract and rolls monthly on the 5th through 9th business days.
    1 Mar 2014, 02:40 PM Reply Like
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