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Robert Edwards
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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
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  • The Bearish Cycle In Natural Gas Ends Tuesday July 21st, So Be Cautious Trading DGAZ Over The Next 3 To 4 Weeks

    The above chart is a daily chart of August Natural Gas. Natural gas has rallied up 4 of the last 5 days. Recently natural gas has sold off whenever we traded into the $2.90s and traders have successfully bought the triple leveraged ETN (NYSEARCA:DGAZ) to benefit from the selloffs. For instance, back in early June we rallied from just above $2.60 up to $2.95 in three days (June 8th to June 10th). Then came Thursday's inventory report and we were knocked down Thursday and Friday to the $2.77 level. That was followed by a retest of $2.95 and roll over which brought sideways to lower action for 3 weeks. Now today is another Thursday inventory report and we are coming in on strength. It is anticipated we could again get a small selloff today and possibly Friday, since the expected 95 MMBtu number is slightly higher than last week's 91 MMBtu number.

    However, ben2008, the administrator at firstenercastfinancial.com is looking for 92 MMBtu today, and 64, 50 and 53 MMBtu figures for the following 3 reports. click here. These are low figures for this time of year and tells me that we are indeed headed to $3.00 and possibly to $3.25 or higher, over the next 3 weeks. Initially one might be able to successfully buy DGAZ as we are in the resistance level of the $2.90 to $2.95 level that has recently been resistance, but take your profits quickly.

    We are finishing up the last 4 days of a bearish cycle that occurs every summer from the 11th trading day in June and continuing through the 14th trading day of July. The dates this year are June 14th through July 21st. Thus, the bearish cycle ends next Tuesday. You can read about the cycle from Jay Kaeppel, click here. This year the pattern worked great until last Thursday's low. But we are now rallying and could in fact end up closing strong through next Tuesday which would cause the pattern to fail. What is most important for traders to realize is that the bearish cycle ends soon. Apparently it is common for weather to heat up beginning the middle of next week, which typically ends the bearish cycle in natural gas. Thanks to usage of air conditioners, there is a drawdown in inventories and natural gas has a seasonal strong rally period. With the heat wave forecast for the next 3 weeks, one would expect this year will show season strength through the first week of August. Enjoy your DGAZ trades for now, but realize that if we move above $2.95 and especially $3.00, one needs to abandon that trading strategy and join the UGAZ party.

    Last week on the Thursday inventory reporting day, we came into the report on the weak side, having fallen for the previous 2 days. I correctly recommended being short through the report using DGAZ for a daytrade, taking profits a few minutes following the report. That turned out to be the bottom at $2.644 and we closed up last Thursday and have rallied ever since.

    This week we are coming into the report strong, but could easily get a selloff since a number in the 90s is substantial. However, one needs to utilize any weakness one sees in natural gas over the next 2-3 trading sessions to position themselves into UGAZ as that should be the winning side as we move into August.

    To follow along as we short out-of-the money commodity puts and calls, or trade crude oil (UWTI and DWTI), gold, natural gas (UGAZ and DGAZ) and other commodities, join us in our private Short Bull Trading Room on WeChat. Just download the free app on your phone or tablet, and then add "bobed1". You can then send me a message so I can invite you into the room. Still plenty of room.

    You can also subscribe to my free weekly newsletter. Send an email to shortbull2020@yahoo.com if interested in subscribing. Again, it is free!

    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
    Jul 16 6:03 AM | Link | 1 Comment
  • Selling Out Of The Money December Lean Hog Puts For Income!

    I first posted this trading opportunity on Seeking Alpha on June 21, 2015, click here. If you did not see that article, you will need to read it so that you will understand the basic setup of the trade. This involves selling far out of the money put options (and possibly calls later) in December Lean Hog Futures. Here is the current daily chart of December Lean Hogs:

    When I posted my last article, December Lean Hogs had closed near their contract lows, around $61.50. The next trading day, Monday, June 22, 2015, we opened weak and then made a spike low at $59.17, which allowed me to sell several December 2015 Lean Hog 50 strike puts for over $1 premium. If you are familiar with options you know even on the lows of the day, I was selling something over $9 out of the money and getting $1 premium so there is a slim chance that I will get exercised and be put long in the market. $1 premium is worth $400 and the highest priced put I sold was $1.15 ($460).

    You can see from the chart that December Lean Hogs then stabilized and traded sideways for the remainder of the week. The following week, saw a sharp short-covering rally to just under $65, making my options lose in value. I was able to buy the options back at a much lower price than I had sold them for and I was able to pocket the difference. The options I bought were cheaper now because they were even further out of the money than when they were sold. Each day that we stayed around $64, additional slippage was seen. I figured we would roll back over and retest the bottom, which we soon did. For the past three trading days, December Lean Hogs have fallen hard and on Friday made a new life-of-contract low at $58.65 with a low close of $59.10. Before the $50 strike puts that were about $9 to $10 out of the money when I sold them were valued at around $1. Now that we are trading at lower levels, to get the option that is now about $9 to $10 out of the money, you would have to sell the $48 strike put. You need to go to www.cmegroup.com click here, to view the option prices. The December Lean Hog 46 strike closed at .775, up 10 cents, the 48 strike put closed at $1.10, up 22.5 cents on the day, and the 50 strike put closed at $1.450 up 30 cents on the day. As you move closer to $59 where December futures are trading and are closer to being "in the money" the price of the option increases. If I sell a 48 strike put on Monday to open a position, I am hoping that we open weaker and the premium I receive is closer to $1.30, instead of the $1.10 available on Friday.

    Looking at the pricing of the 48 strike put option, that closed at $1.10 on Friday, if we fall another $2 in lean hogs, the price of the option should rise to where the 50 strike option is valued right now ($1.45). Thus if I had sold the 48 strike option on Friday for $1.10 and Dec Lean Hogs fall $2 on Monday morning, the value of the option will rise to $1.45 and I will be losing 35 cents ($140). If however, we rallied $2 on Monday, the value of the option would decrease to $.775 and I would be making 32.5 cents ($130). If a $2 move up on down only changes the option value about 35 cents, then the "delta" is .175. Being so far out-of-the-money it takes a big move of $2 to get the value to change much. The margin I would be charged to sell this option is equal to the delta times the normal margin. Instead of risking a full contract if I was playing the futures and going long a contract, I am selling an out-of-the-money put that is equivalent of risking 17.5% of a full contract. If the full margin was $1200 to sell a full contract, it would only be $210 margin to sell this put. Also consider that if you sold the put for $1.10, they placed $440 into your trading account which is over double the margin. To prevent you from getting too many contracts, the system adds a little extra in there, where the margin may be closer to $400 to $500.

    Realize that as you get closer and closer to being "in-the-money" the delta increases. The options at the money typically have a delta of .50 so if Lean Hogs were trading at 58.00 and you sold a 58 put, you would make or lose about 1/2 as much as you would if you were playing the futures contract instead. The rate that the delta changes is called "gamma" but that is not important to understand the basics. For a quick review on the "Greeks" click here.

    I should also mention "Vega", which is the amount an option changes for a one point change in implied volatility. I think of Vega as how much air is in the balloon. Heat up a balloon and it expands but chill a balloon and it contracts. That is Vega. If the market is moving wildly up and down, the options are considered hot and the premiums expand. You want to sell options when the Vega value is large. Right now the Vega for December Lean Hog puts are going up in greater amounts each day than one would calculate based on the delta change. For instance, if hogs fell on Monday $2, I previously calculated the option premium should increase from $1.10 to $1.45. But what if it jumped to $1.60 or $1.70 instead. If sentiment turns more bearish the put buyers might bid up the prices beyond what they should have been because the implied volatility has increased. Put sellers are asking for more premium as it is riskier being short options when prices are falling fast and their is greater risk of the option going "into the money" where it might be exercised. When Vega values are low, that is when you want to buy options as they are very cheap (no air in the balloon). The two most important concepts to remember are Delta and Vega.

    When a novice first starts trading commodities they often purchase inexpensive calls and puts. This limits their exposure to risk as they cannot lose more money than the option purchase price. However, a vast majority of options expire worthless so the market has to move your way almost immediately. That is why I prefer selling far out-of-the money puts and calls. Sure, there is unlimited risk when going short an option, but there is the same unlimited risk when one buys or sells a futures contract. This so called "unlimited risk" is still a very known risk and the odds are stacked in favor of the seller just like odds are stacked in favor of the "gambling house" in blackjack or poker. If I am trading an option I would rather be the "house" rather than the poor gambler.

    To follow along as we short out-of-the money commodity puts and calls, or trade crude oil (UWTI and DWTI), gold, natural gas (UGAZ and DGAZ) and other commodities, join us in our private Short Bull Trading Room on WeChat. Just download the free app on your phone or tablet, and then add "bobed1". You can then send me a message so I can invite you into the room. Still plenty of room.

    You can also subscribe to my free weekly newsletter. Send an email to shortbull2020@yahoo.com if interested in subscribing. Again, it is free!

    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.

    Jul 11 9:54 PM | Link | 1 Comment
  • Buying Natural Gas (UGAZ) And Crude Oil (UWTI) On Dips

    Natural Gas

    Natural Gas futures bottomed this past week on Thursday, after getting the typical post inventory report selloff. I recommended in the Short Bull Traders WeChat room to hedge long positions by buying DGAZ through the report and then taking profits on DGAZ after the report. Worked out great and we rallied back up and closed up for the week. I then predicted a move back to $2.80 to $2.85 which we got on Friday.

    (click to enlarge)

    If the warm weather is sustained, expect further rallies this coming week up towards $2.25 in UGAZ. If there is any weakness do not expect to see much of a selloff below $1.75. With natural gas it is best to trade very short-term like intraday or owning the triple leveraged ETFs just a couple days at a time. If we can get above $2.50 in UGAZ, expect to see $3.00 to $3.25 soon thereafter. Otherwise expect to see a trading range of $1.75 to $2.25 for the time being. When natural gas rallied into the Thursday close, I mentioned that this was a good sign for the Friday rally which we got. I also mentioned I liked owning UGAZ over UWTI and I still agree with that statement.

    Crude Oil

    Crude Oil finally stopped falling on Tuesday this past week, bottoming at $50.58. There is excellent support in the $49.50 to $50 level. I anticipate working back towards $55 this coming week and continue like buying on all dips. I agree with T Boone Pickens and others that we should trade by the end of the year in the $75 to $75 range and do not believe the media hype and fear mongering about retesting the mid $40s or worse. At worst I see short-term sideways action but with an upward bias and gradually rallying to fill the gap at $57 and eventually working up to the $60 level and beyond.

    For several months I have been red hot in calling not only the macro moves in crude oil, but even the intraday movements up and down, with timely recommendations to buy UWTI or DWTI at different points during the day. A good example was last Wednesday when I was asked if UWTI was a buy when trading at $2.21 and I mentioned I liked it at $2.00. That turned out to be the low of the day. Also when we formed the bullish hammer pattern on Tuesday when others were extremely bullish and UWTI was hitting the high of the day at $2.31, I recommending one take profits on all profitable UWTI shares bought on the day's dip and actually hedging by buying DWTI. Those who did so were quite happy to take profits in DWTI on the Wednesday dip, and also buy back their UWTI at low prices again on the drop to $2. Then on Thursday I predicted early morning strength and then a dip to close at $52.25 at the 2:30 pm EST close and further selloff to $51.75 to end out the week. I was right about the early strength and selloff and we stopped exactly at $52.25 which allowed DWTI buyers to take profits. However it occurred 35 minutes before the close and we rallied back up nearly 50 cents to close near unchanged. Here is a chart of UWTI:

    (click to enlarge)

    You will notice that we are still vulnerable to a drop as low as $1.80 in UWTI, but eventually should work our way back up towards $3 and higher. This coming week, if we can manage a pop in crude oil to the $55 to $56 level, UWTI would rally to $2.50 to $2.65.

    To follow along as we trade crude oil (UWTI and DWTI), gold, natural gas (UGAZ and DGAZ) and other commodities, join us in our private Short Bull Trading Room on WeChat. Just download the free app on your phone or tablet, and then add "bobed1". You can then send me a message so I can invite you into the room. Still plenty of room.

    You can also subscribe to my free weekly newsletter. Send an email to shortbull2020@yahoo.com if interested in subscribing. Again, it is free!

    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, UWTI, DWTI
    Jul 11 6:02 PM | Link | Comment!
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