Seeking Alpha

Robert Edwards'  Instablog

Robert Edwards
Send Message
Contrarian daytrading technician who specializes in locating high probability short term trades while predicting price movement directions with over 85% accuracy. Most of my trading involves either extremely short term micro scalping of stocks or commodities (using 1 minute bar charts), or swing... More
View Robert Edwards' Instablogs on:
  • Natural Gas Needs To Find Support Soon!

    Background

    For a couple timely articles on the current state of natural gas prices, check out an article from Andrew Heght here, as well as an older article from Lior Cohen, found here. I agree with Andrew Heght that natural gas tends to rally and top out seasonally around the middle of February. That means we have a 6 to 7 week window to get a decent rally in natural gas. We are extremely oversold and due for a correction higher, and cold weather could still bail out the leveraged natural gas UGAZ ETN bulls. However, since it was warmer than normal last week, the inventory report to be announced on December 31st could cause a selloff later this week, so I am going to wait until after the report to get long natural gas futures. If we do get a selloff in UGAZ following this week's inventory report announcement, that should be a great place for a bullish scalp.

    UGAZ vs. FCG

    Instead of owning the very volatile triple leveraged UGAZ ETN that is quite volatile and subject to slippage, making it a poor investment unless one trades it very, very short term, there is a very good way to play natural gas from the long side without suffering as much volatility and slippage. By buying the natural gas resource stocks through purchase of the First Trust ISE Revere Natural Gas Fund (NYSEARCA:FCG), one can get bullish exposure in a vehicle that one can hold long-term. Buying FCG is much easier to hold through the bottom than UGAZ is since it is not leveraged. For an excellent Zachs research article that provides some fundamental information on FCG, click here. For the technical perspective, here is a long-term monthly chart of FCG:

    (click to enlarge)

    The FCG ETF began trading in the middle of 2007. Initially the $18 area was support and by June 2008, FCG had traded above $32. However when the price of oil tanked in late 2008 as we suffered through the financial crisis, FCG dropped to the low $8 area where it bottomed. Since then, $24 has capped rallies. Presently FCG is trading off recent lows of $10.11, while the natural gas futures price is near its lows. It is apparent that under $12, FCG has tremendous long-term value and when natural gas prices recover, which they will sooner than later, one should be able to more than double their money in FCG if they purchase below $12 and ride it back up to the $24 resistance level. Although FCG tracks natural gas producers, it appears to follow the price of oil more than the price of natural gas, and when crude oil prices stabilize and begin their recovery, FCG should recover as well.

    Before I end this brief instablog article, I would like to take a quick look at the daily chart of the triple leveraged UGAZ ETN:

    (click to enlarge)

    UGAZ hit a low of $4.78 today, but has now rallied back above $5.00 and is presently on the high of the day at $5.01. Natural gas prices are struggling in here just below or above the $3.00 level. Despite the current weakness, it is not unreasonable to expect to see natural gas prices return to the November highs above $4.50, if we should get some cold weather. That would be a 50% rise in natural gas prices, and a 150% increase in UGAZ to the $12.50 level. Even if natural gas prices do not bottom in here based on a cold winter, we could get a late spring/early summer rally on extreme heat when air conditioning season rolls in. If you check out the long-term chart of natural gas, you will find that natural gas prices under $3 has only occurred twice in the last several years, in 2009 when a $2.409 low was struck in September, and in 2012 when a $1.902 low was struck in April of that year.

    A Caveat

    It is possible that they will keep overproducing natural gas at the current torrid pace and we don't get a cold winter bailout. In that case, 2015 could repeat the 2012 pattern. Back in December 2011, the low in natural gas was $2.957 which is similar to the present December 2014 low, just under $3.00. It is possible that natural gas prices continue to fall to the $2.40 or even the $2.00 level. If we do continue to fall, most of the damage will occur in January 2015. Back in January 2012, a low of $2.231 was made, and natural gas prices bounced for a couple months before ultimately falling below $2.00 in April. By July 2012, prices had rebounded back to the $3.277 level. Anyone long UGAZ who rides through the bottom, will be wiped out in UGAZ. Anyone now holding UGAZ must be careful to bail out of UGAZ if cold weather does not soon rally natural gas prices strongly above $3.00. Bulls do not want natural gas prices to start trading below $2.90, slipping much lower than where we have recently been. If natural gas prices should break $2.70, then $2.00 would be the next target. We are presently approaching some critical long-term support prices. I don't currently own any UGAZ and don't want to be a hero. I want to wait to see if prices in natural gas can stabilize. I do want to eventually buy natural gas futures aggressively, but for now I am patiently waiting for signs of a bottom. Right now, nothing bullish to report.

    Disclaimer:

    The thoughts and opinions in this article, along with all Stocktalk 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.

    Dec 29 12:51 PM | Link | 4 Comments
  • Gold Broke Down Yesterday, So Now Where Will It Go?

    Introduction

    I read an interesting article from Daryl Guppy, click here, where he is predicting lower prices for gold going forward. However, it mentions the possibility that gold goes sideways for an extended period of time below $1235, but above critical support at $1140. That is where I believe gold will trade in the immediate future. Since we are now trading in the $1170s as I type, we are much closer to the bottom than the top of that $90 range. I would therefore recommend buying on dips in gold and selling out on rallies. Regarding the miners, they continue to drop to lower prices with little interest by funds or traders to buy them. Instead of buying leveraged JNUG or NUGT, I prefer owning IamGold (NYSE:IAG) on dips as the company has a cash infusion coming from recent asset sales. The only caveat is the fact that the CEO of IAG continues to sell out his large position, even on recent weakness. Stocks where the CEO and other upper management includes Yamana Gold (NYSE:AUY), Kinross Gold (NYSE:KGC), and Barrick Resources (NYSE:ABX). You might want to check out the charts of these stocks and decide which chart you like the best, and buy these stocks on dips. The overall averages of GDX/GDXJ include lots of stocks that have deteriorating fundamentals and very negative sentiment, so the larger indexes, although more diversified, will probably continue to underperform the stock action of the companies I just mentioned.

    Fundamentals Should Start Improving For Miners

    There are many fundamental reasons to continue to buy gold and the miners and the fundamentals should improve going forward. Recently gold was hurt by comments that Russia may have to sell gold to support the falling Ruble. Well, we now find out that Russia is still accumulating gold so that is not an issue. Today I even saw an article suggesting that Russia could go on the gold standard. Not happening in the short term. Anyway, another factor, tax loss selling, should be about completed, so that negative should improve. As the new year comes, bargain hunters could come in and buy the beaten down stocks in the metals and energy sectors, which should also support the miners.

    With crude oil now stabilizing a bit in the mid $50s, there should be fewer selloffs in the future attributed to further selloffs in crude oil. The stock market is near all-time highs which has also been hurting gold as traders ignore gold in favor of stocks. Well, the bullish December time frame is nearly ended. With some profit-taking in the new year, that might help support gold some. Going into the Chinese New Year a couple months from now, is usually a time when there is Asian gold buying which could support gold as well.

    Since gold has been weak to sideways in the 4th quarter of 2014, similar to the fourth quarter of 2013, one might soon see a gold rally and even stronger gold mining stock rally, in the first quarter of 2015. Also, since the bear market in gold stocks has gone on for 3 years and 3 months, since hitting all-time highs in September 2011, it is very "long in the tooth" and overdue for a bottom. And if you need further proof, just check out comments from my favorite trading astrologist Mahendra, click here. He sees the US Dollar sideways in the first half of 2015 and then moving higher in the last half. He sees gold continuing the struggle it has been in, during the first half, but is looking for a strong move up in gold beginning next summer. Lets hope we don't have to wait that long!

    Disclaimer:

    The thoughts and opinions in this article, along with all Stocktalk 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.

    Dec 23 10:39 AM | Link | Comment!
  • First Day Of Winter & Colder Temperature Forecasts, So Why Did Natural Gas Hit New Yearly Lows Friday?

    For some good background on the current fundamentals, read this item posted by Christian Berthelsen at firstenercastfinancial.com, by clicking here. After a cold snap in November, we had a warmer than expected December which did little to use up the large amounts of gas presently being produced. That probably explains why we rallied briefly on Thursday after a slightly bigger drawdown than expected, but then prices went negative because weekly withdrawals are running in the 60s when they should be in the 150s. Ben at firstenercastfinancial.com was a bit light in only predicting -55 in last Thursday's report. I hope that trend continues as he is predicting -59, -102 and -131 over the next 3 reporting periods. It is turning colder but we need to see those withdrawal numbers greater than -150. Checking here, you can see that we could still average natural gas prices at $5.60 in February 2015, so all is not lost yet for the bulls holding long in the triple leveraged natural gas ETN (NYSEARCA:UGAZ).

    However, Friday's action cannot be construed as bullish. With withdrawals running so low for the next few weeks, we can expect for the bears to press the downside a bit more in here, just like they did back in the 3rd week of October 2014, just before we had a big 90+ cent surge up in November.

    For a very sobering look ahead, check out this video posted at fxempire.com, click here. Christopher Lewis mentions a potential fall to $3.00. If you took a look at the long-term charts, it is true that we are vulnerable to that severe of a fall, sometime in the future, but unlikely it will be seen during the winter withdrawal season. In fact, for this time of year, we are at very depressed prices already.

    I have not liked the action in Natural gas for some time and got out on strength and did not buy back in on the weakness of the last couple days. I am not nearly as bearish as Christopher Lewis, but I also don't want to be a hero and call a bottom in a market making new lows when it should be heading seasonally, the opposite direction. I suspect that I will be buying both natural gas and UGAZ shortly, but will wait for prices to stabilize and present a good buying setup.

    If you look at a montly chart of natural gas, you will notice that in December 2013, we pretty well stayed above $4 except for a brief dip to $3.90, closing the month at $4.23. December of 2012 was not nearly as strong because in April 2012, Natural Gas fell to $1.90. So the December 2012 range of $3.26 to $3.75 is not too bad, considering what just came before. Surely December 2014 natural gas prices will stay above that $3.26 price low hit 2 years ago. In any case, since November 2014, closed at $4.088, it is apparent that December 2014 will likely close lower than the previous month. It is rare for December prices to be weaker than November, but it has indeed occurred this year, like it did in 2012. Back then, it caused further weakness in January 2013, where the range was from $3.05 to $3.645, closing just 1.2 cents lower than the previous month at $3.339. However, even during that weak price period, natural gas would rally in March 2013 up to $4.12 and to $4.429 in April. Here is the daily chart of UGAZ:

    (click to enlarge)

    UGAZ overdid it on Friday to the downside, falling a bit more than 3 times the amount that natural gas fell. UGAZ traders were liquidating on Friday with more carnage likely on the way. Back in late October, UGAZ broke support from the $13.30 area, and fell to $10, a drop of 24%. Since UGAZ is again breaking the $8.12 support, a similar 24% fall lower would get you to $6. Hopefully we get a decent bounce from there like we did in November, with colder weather to arrive in January 2015.

    Also, keep in mind that there is very strong support in natural gas at $3.00 and below. Personally I don't see us falling worse than $3.26, especially being in the winter. From $3.50 that would be a drop of 24 cents, or just under 7%. With UGAZ closing at $7.27 on Friday, it appears vulnerable to a further drop 21% lower to about $5.75. If UGAZ would fall to a price of $5.75, then a rally in natural gas from the $3.26 area back towards $4.50, would cause a rally off the bottom of 38%. That would be a pop of 114% off a $5.75 low, brining UGAZ back to $12.31. If natural gas can hold in the $3.35 to $3.40 area, then UGAZ could more easily rally back towards $13. These are minimum figures based on a typical winter. If we get something approaching what we got last winter, then UGAZ can high much higher targets of $15 to $18 and higher.

    The current scenario playing out, illustrates the fact that you do not want to hold UGAZ long-term. When natural gas is in an uptrend and moving higher, then UGAZ is a great intraday or maybe overnight scalping tool. However, if prices are dropping, the leveraged aspect and slippage in UGAZ will making it quickly turn toxic.

    Summary:

    Although the future looks challenging, back in late October 2014, UGAZ bottomed at $10.18, and quickly rallied in a couple weeks to $18.75. That was an increase of 84%. On Friday, UGAZ closed at $7.27. Calculating a similar 84% pop off $7.27, gets you to a UGAZ price of $13.38.

    All is not lost, but UGAZ is not nearly as strong as I was anticipating it would be, just a month ago. Of course this can all change on a moment's notice. But for now, UGAZ looks like it can be bought on dips from $7, down to $5.75, with potential near-term upward potential towards $12 to $13.

    Disclaimer:

    The thoughts and opinions in this article, along with all Stocktalk 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.

    Tags: UGAZ, DGAZ
    Dec 21 6:14 PM | Link | 10 Comments
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.