By Danny Devito, investingformula.blogspot.com
What play in favour of Natural Gas, is that is stil the unique commodity on the low, and it is a energy (one of the most wanted) and that the Crude Oil even in correction is still so high since recent lows.
On the other side, Crude Oil entered in a correction that should last for some month and indexes are ready to do the same. People was betting heavily on gas can have now some fear that investors could look to other cheap bargains in correction.
However, the gas is still on the low and is lower than other stocks and commodities, so let's stay concentrated to find good supports and a potential "cyclical low" as the cousin USO and Crude Oil did months ago.
The technique I'm using to calculate some supports or resistance is some time a simple calculation of "projections". In particulare I was studing and trading since months the projection you can see on this chart below of the rally of march that in a single day since thre price rally of 20%. The bearish projection of the % distance from the low to the high of that rally, that perhaps was just 1 bar/candle/day, was the level of 3.05 of NG future. On the other side I calculated with a classic support/resistance analisys (horrizontal levels only, never dynamic) the leve of support of 3.25 USD. What happened? The gas future touched the level of 3.15 that was esactly between my area prognosticated. Now as prudential trader, I acted on the first support, not heavily, with some small bet, waiting and "hoping" to see a lower price. I lost because the gas made a rally then to 4.50 usd as you can see in 1 month or so.
But, that pattern, projections or idea as we want to call, is still "calling" a target not satisfied that is as I said the level of 3.05. Today we are trading at 3.37 area so we are near again and who knows the low will be in that area 3.05 so is for the future my key level, than as I said, the price can even go further 5/10% below a key level, but as you see gas is able to rally 40/50% too in few months, so shouldn't be a problem to hold sometime.
Now le'ts analyze the ETF of Natural Gas so the famous UNG.
In the chart below you can see the same chart and projection.
The target I had was 12.42 for USO but it stopped at 12.69!
So even the UNG was so near to satisfy that projection and still today can
come back in play that target, but however today with the new low UNG already
did that target. The problem is that is past the time... and the ETF due the impact
of rollovers is weaker and so arrived before the future to the target.
That's why, we need to use the gas again, and this contract in the specific to calculate again where we could arrive in few days on the UNG etf.
The calculation is simple.
NG future trade in this moment I write 3.37 and UND 12.22.
12.22/3.37*3.05= 11.05 USD
So i want to make a correction to the analisys of few days ago because was hold and I see that the ETF still lost something in the recent rollover, so the new precise level of my target is 11.05. Seem far, i don't know if UNG will be able to stay there just 1 minute, 1 spike, or 1 week, but that is my idea.
Now to you can see so far or so expensive that 11.05, to you the choise to buy the ETF, to sell put, to buy shares and sell call and go on, we have an infinity of strategies to apply.
What I will watch each day howeve will be the value of the 12 and 11 put july and august. Even watching the chart of the spread UNG/USO I can see the volatility that is in play and should confirm that we are near to some level hot for UNG. The problem is which. I had this target in my mind since months, but you know, the gas made a rally so from 12.69 went up to 17. Correction, you start to sell a bit of "put" because the probability that will be that month the acceleration to go the bottom is low, and then, here we are, and here we should play hard.
What I can say is that I do not see any reasons to calculate bigger and deeper targets with a projections on the down side 12.69/17.55 area that have a drammatic target at 9.17/18 USD... I don't think we should thing to such drammatic scenario, even if is not impossible..
UNG and USO are not easy to play, may be are more easy to play short than long for their strange nature. But after april rally, seem that USO is a lot more reactive then the past, and if in the past could be an error to anticipate the trend, now see that the trend and the volatility could help some long bet.
Up to you, always waiting for your ideas on Gas, NG and so on.
This is the end of day chart of UNG.