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Michael Noonan Edge Trader Plus Michael Noonan is the driving force behind Edge Trader Plus. He has been in the futures business for 30 years, functioning primarily in an individual capacity. He was the research analyst for the largest investment banker in the South, at one time, and he... More
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  • Natural Gas - A Bottom-Pickers Nemesis. At A Danger Point? 0 comments
    Oct 13, 2010 9:49 AM

    Wednesday  13 October 2010

     New York markets are not our favorite because we are of the mind
    that floor traders rip-off fills like no where else.  However, when a
    situation presents itself, sometimes we put our bias aside and trade
    a NY market, anyway.  Natural Gas is such a situation.

     The most important piece of knowledge one can have about any
    market is the trend.  Knowing the prevailing direction of price is like
    having trading winds at our backs.  Why then, consider buying a
    market the trend of which is clearly down?  There are times when a
    market forms a set up we call the "danger point."  While the trend is
    down, the developing market activity is very contrary to bearish

     One way of viewing any market is by observing known facts and
    drawing logical conclusions from them.  The level of decline since
    late September to now is decidedly less than the level of decline
    from August  to September.  There have been numerous attempts
    by bottom-pickers to buy the inexorable decline in Natural Gas,
    while other markets have rallied.  What makes this buy attempt any
    different?  While the trade could fail, the probability of catching a
    market turn is greater here than it has been in the past. 

     A "danger point" is where a market has all the appearances of
    continuing lower but does not.  The risk in buying a "danger point"
    is less than most would realize, and one then places a stop and lets
    the market  develop.  The rate of decline coming to a halt is one
    consideration that tells us price has stopped downward momentum. 
    Note the highest volume bar on the chart.  It corresponds to a wide
    range bar down that has a poor close at the bottom of the range,
    5th bar from the end.

     The ease of movement is obviously down, and the increased volume
    tells us that sellers were totally in control, at least under normal
    circumstances.  Here is an example of why price and volume cannot
    be reduced to mechanical application, but are a form of art in the
    reading.  Actually, the sharp increase in volume, when there is not
    follow-through, then becomes a huge red flag.  The interpretation of
    the activity for that specific day now tells us that there was a change
    from strong hand selling to strong hand buying.  Funds and the
    public were likely sellers, while smart money is scooping up
    everything being sold.  This is the reason why there is not more
    downside follow-through.  Smart money has been buying and will
    now defend this price level. 

     If the assessment is right, there will be a market turn, and the
    "danger point" will be a low risk entry.  How so?  Others looking at
    the chart will wait for more confirmation, in the form of higher prices,
    before stepping in to buy.  Buying at a higher level, for example, a
    close above 4.400 where price last failed, increases the risk because
    a stop would have to be under the recent lows.

     Buying at the danger point means we are buying much lower, 4.283, 
    with a stop just under the recent lows.  Getting long at that price is at
    least 117 tics lower than waiting for a confirmed breakout above 4.400,
    a substantial edge.  Also, we will know fairly soon after initiating the
    trade whether or not it will work, usually within a few days.

     It is always smart to know where price is on the next higher time frame,
    and that is a weekly chart.

     NGG D 13 Oct 10

     Here again, the rate of descent has abated substantially, and price
    is at the 50% retracement area, offering potential support.  The further
    price moves along the right hand side of a trading range, the closer it
    is to making a large move.  It could be continuation of the previous
    trend, or it could be a turnaround.

     Note how from the Aug '09 low, it took 18 weeks to reach the rally
    high in January 2010.  Since that high, price is now in its 40th week 
    of retracing the rally, and it has declined only half-way back in all that
    time.  The market message there is that selling pressure just is not
    that great.  Weekly charts are not good for timing entry, so we glean
    from it what we can by making the factual assessment and draw a 
    logical conclusion, and it supports that made from the daily chart.

     Long Feb Natural Gas from 4.283, a danger point.

    NG W 13 Oct 10

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