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Robert Edwards
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Contrarian daytrading technician who specializes in micro scalping of stocks (using 1 minute bar charts), swing trading of stocks overnight, weekly stock option premium selling, pre-market and post-market psuedo market maker and stealth trading activity, and selling commodity option strangles... More
  • UGAZ/DGAZ: Natural Gas Is Now Below $4.00 For The First Time Since January So Now What? 10 comments
    Jul 17, 2014 6:30 PM | about stocks: UGAZ, DGAZ

    (click to enlarge)

    Looking at the above weekly chart of the August 2014 Natural Gas Futures price going back a year, I would like to bring your attention to look at the white candle that was made at the beginning of November 2013. That candle has a low of about $3.60. From that low, natural gas rallied for 9 straight weeks, to top out at $4.29, a gain of 69 cents. With every cent representing $100, it totals $6,900 per contract, profit potential. But in the 10th week, August Natural Gas was clobbered back down to $3.921 the second week of January 2014. August Natural Gas then rallied for 6 straight weeks, but topped out in the 7th week at $4.891, a gain of 97 cents. Then after trading in a sideways pattern from $4.30 to $4.90 for 16 weeks, five weeks ago August Natural Gas topped out at $4.893 and then has fallen to today's low of $3.936 as shown in the chart. In the past 5 weeks, we have fallen back to within 1.5 cents from the January low of $3.9210. As we approach $3.90, there is significant support near the January low. Also, looking back previously, in 2013 one can see from the chart that $3.80 is support, $3.70, as well as $3.60. With the drawdown in inventories experienced over this recent winter, it would be absurd to think that August Natural Gas or any other contract month, would return to as low as $3.60, the lowest price hit in the last 12 months in August Natural Gas, even though the nearby trading month scored a low of $3.379 at that time.

    Also, it is apparent we are going to close down for 5 straight weeks and that is an extreme amount of time for Natural Gas to move straight down. Markets take the escalator on the way up, but the elevator on the way down. We have fallen slightly over 95 cents off the recent high. The greatest selloff in 2013, was $1.31 in Natural gas, from $4.44 to $3.13 in May to August, and it took 16 weeks and was not straight down. The 95 cent selloff in the past 5 weeks is extreme! Natural gas has lost over 20% of its value in only 5 weeks!

    UGAZ Hit A Low Of $15.77 Today!

    (click to enlarge)

    UGAZ was forming a shelf of support around $18, but today's nearly 4% drop in natural gas, caused a low to be struck of $15.77 in the triple leveraged bullish natural gas ETN (NYSEARCA:UGAZ). If natural gas falls another 10%, from the $3.90s to the $3.50s, UGAZ could suffer another 30% drop from today's close, down to $13.33. Space your buys accordingly and be happy when UGAZ bottoms at $14 or $15.

    If one is accumulating UGAZ, one way to keep from getting too many shares at too high of a price, is to use the $4.00 price of Natural Gas as a pivot. Instead of adding on more weakness, just sit aside and wait for natural gas to bottom. Then when the price moves back above $4, UGAZ will move above $17. Using a stop limit buy order to initiate a position, buy when UGAZ hits $17 and leave the cheap prices alone. However, if UGAZ moves into the low $14s or into the $13s, then one will have cash available to buy in cheap. Nothing wrong with waiting though for UGAZ to begin a rebound off of the bottom, and complete your buy with a buy stop limit order placed at $17. In this way, instead of catching a falling knife, one can wait until natural gas has bottomed and is trending back up.

    Long-term, one wants natural gas to trade above $4 as UGAZ will then be the play. If natural gas makes its home below $4 then DGAZ will be the play.

    A Caveat

    At the First Entercast Financial website I saw an article, click here, by Breanne Dougherty, who is calling for no relief to cheap natural gas prices for over two years. Since producers can make a profit on natural gas at $3.00/mmBtu, he sees no reason for natural gas prices to trade any higher than $3 for the foreseeable future, as producers will produce as much as they can possibly produce with no restraint on supply. Natural gas is a byproduct of oil production, along with production of methane, butane, propane, etc. So if producers can make money off of the oil or other hydrocarbon they are going after, anything they get for the natural gas is just a bonus. Well, I don't agree with this scenario because if natural gas prices stay around $3 for over 2 years, truck fleets, taxis, and many a new car purchased by misers, would start running on natural gas instead of crude oil. The cure for cheap prices is cheap prices. Natural gas prices in the world is priced at $8, $10, or higher! We have been spoiled since the U.S. is the Saudi Arabia of Natural Gas. We are not there yet of course, but eventually the only play will be in UGAZ as the price of natural gas will work higher and higher. My father was an oil producer, and growing up, I can remember $3 for a barrel of crude, as a high price. Then came the 1970s oil embargo and crude jumped to $30. Today it is $100 or higher. In my lifetime, I foresee a similar increase in natural gas prices at some point, to $25/mmBtu or higher. Industries in the U.S. are aware that natural gas is a cheap energy source and they will capitalize and use up the excess supplies sooner than many think, IMHO.


    The thoughts and opinions in this article, along with all stock talk posts made by Robert Edwards, are my own. I am merely giving my interpretation of market moves as I see them. I am sharing what I am doing in my own trading. Sometimes I am correct, while other times I am wrong. They are not trading recommendations, but just another opinion that one may consider as one does their own due diligence.

    Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in UGAZ over the next 72 hours.

    Stocks: UGAZ, DGAZ
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Comments (10)
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  • Lefty6x6
    , contributor
    Comments (55) | Send Message
    I more or less agree with RE here. However, a few things to throw in that probably don't amount to anything -- but possibly some anecdotal 'evidence' ....


    Being from NE central Pa. and still having many family and friends there - most of them farmers and land owners, I am familiar with the past 5 years or so of drilling that has gone on in the region.


    there are lots - and by lots I mean a sh!t ton of natural gas wells tat have been drilled up there....but here's the thing:


    most of the farmers / landowners that I know (and I mean personally, not 'friend of a friend who knows Jimmy so-and-so who heard from the town barber blah, blah, blah...' -- that leased their land to the drillers have wells and pipelines sitting developed, and capped, sitting idol on their land.


    They are getting royalty checks and lease agreement payments; but those dollars are being paid by refiners and transit companies that have not even moved a single mmbtu to date.


    Now, I'm not saying that it's all of the wells in the region - but in Bradford, Tioga, Sullivan and Lycoming counties there are a LOT of dormant wells and systems.


    (in small towns there are few secrets...)


    The point is that popular opinion (which may be very far away from anything resembling 'truth' of course) is that there is a massive 'drill, find, pipe, cap it and move on' situation that is going on.


    Maybe the expectation of the Keystone pipeline to be running and accepting inflows is the reason behind the dormancy; but there are a lot of people that are 'close to the situation' - by way of getting current and future royalty checks - that think that at some point in the not too distant future, someone is going to yell "GO !" and there will be literally hundreds of wells pumping nat gas out of the ground at a rate previously unseen as far as production and delivery goes.


    That point in time may be this summer prior to winter demand spike, it may be held up until infrastructure is in place to move it after it is out of the ground.


    I have no idea. the more I know, the less understand, so I sure don't portend to be a prophet of any sort.


    Nat gas is really no different (in my opinion) than any other commodity in that it is a demand and production cost driven pricing structure.


    The US being the 'Saudi Arabia' of nat gas is fitting; the big money is not so much in the product itself but in the companies that are going to be on the infrastructure development side of getting it out of the US and onto the world wide market, thereby driving the worldwide price down off of that $8, $10, or higher...


    A lot of people are going to make a lot of money on the natural gas development and exporting side of things in the years to come...


    ...and along with a lot of Pennsylvania farmers that have signed, sealed and delivered 10 and 20 year land leases in hand, I plan to be one of them....


    rock on !
    17 Jul 2014, 08:42 PM Reply Like
  • $DUST
    , contributor
    Comments (148) | Send Message
    I read a lot about us being the SA of gas. With fracking they say we are about to become SA of oil as well. But are we building the exporting infrastructure? For as far as I know its almost non-existent. I always wondered, if EU is starving for Gas, and it costs there 3x it costs here, how come no-one put the two and two together yet? Our prices would go up and theirs down, plus, you eliminate Russia out of the picture and being beholden to it. Anyways, that's what has been bothering me for several years. What interests are stopping this from taking place? - cause surely its not the lack of capital.
    17 Jul 2014, 11:53 PM Reply Like
  • Robert Edwards
    , contributor
    Comments (587) | Send Message
    Author’s reply » I guess Dust, we don't have a pipeline to Europe, and until recently, no one thought about building a Liquefied Natural Gas (NYSEMKT:LNG) terminal to export. The terminals opening in 2015 were originally built for import and are being converted to allow for export. Natural Gas is very explosive and dangerous to deal with. Also our country has environmental regulation hurdles (can't get Keystone Pipeline approved, no new refineries built, can't burn coal without scrubbers etc.). It will take a lot of money but we will get there in a few years.
    18 Jul 2014, 08:36 AM Reply Like
  • mc682
    , contributor
    Comments (4) | Send Message
    Just a quick comment from someone who works in the power industry....The cheaper NG prices allow coal fired power to be replaced with CT or CC facilities temporarily because of the overall cost per MWh being cheaper with NG sitting in the $ 3.90 range. Part of that goes back to the huge scrubbers that are required to burn coal.


    I think as NG continues to fall we will see more power production and industrial use driving prices higher.
    18 Jul 2014, 10:33 PM Reply Like
  • Robert Edwards
    , contributor
    Comments (587) | Send Message
    Author’s reply » Very disappointing action overnight and over the weekend in the "widow maker", natural gas. Don't see any support now in Nat Gas that I would trust. Someone must know something. May not bottom now until $3.00, even if we do bottom there as excess supplies will probably overwhelm the market going into the winter. I am switching to the bear camp now and would use every rally to get short by buying DGAZ or shorting the futures. Only a rally back above $4.00 again would change my mind. Don't see that happening right now. This appears to be a busted trade. I have vacated my long natural gas position and will not be going long this market again anytime soon.
    21 Jul 2014, 08:41 AM Reply Like
  • Robert Edwards
    , contributor
    Comments (587) | Send Message
    Author’s reply » Today, 7/21/14, could be similar to the pattern of 11/4/13. If true, then we could be bottoming today and start a rally tomorrow to fill the gap left from over the weekend. Bulls want to see the gap filled in the next day or two, otherwise it is curtains for the bulls. Natural gas needs to show some strength very quickly or else it will fall much further down.
    21 Jul 2014, 10:20 AM Reply Like
  • Lefty6x6
    , contributor
    Comments (55) | Send Message
    I agree with RE - bulls will be active to keep it floating until injection report this Thursday.


    look for higher volume in DGAZ as positions are taken to hedge.


    limited upside potential at this point.
    21 Jul 2014, 01:52 PM Reply Like
  • $DUST
    , contributor
    Comments (148) | Send Message
    Well, most likely will have to sit on this now way into the winter, but then again, knew that might happen when bought in. Will start adding at $10 or so for a longer run going into next year.


    Only regret is for liquidating my DGAZ way too early :(


    Gl with your trades fellas.
    21 Jul 2014, 02:40 PM Reply Like
  • Rain Man 1
    , contributor
    Comments (6) | Send Message
    Hi Robert, any updates on $UGAZ ?
    29 Jul 2014, 09:08 PM Reply Like
  • Robert Edwards
    , contributor
    Comments (587) | Send Message
    Author’s reply » In the last week we have had two bullish gravestone candlestick patterns that were confirmed with an up day the following day, the last one being today. We were down 7 of the last 8 days before today's late rally. Looking for move off the bottom of 35 to 40 cents soon. Hopefully we have bottomed at 3.725 and don't have to hit 3.700, 3.600 or 3.4500. One of these should be the bottom.
    29 Jul 2014, 10:33 PM Reply Like
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