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.
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.