How To Profit From The Natural Gas Market
Monday, January 5, 2009
by Jim Stanton, Technical & Quantitative Analyst, Smart Profits Report
Welcome to 2009. Here’s hoping for better from the stock market in this New Year than the awful mess that we endured in 2008.
Since I last wrote here on December 22, we’ve seen a fair bit of action, despite the traditional lower volume over the holiday period.
Back then, I included a 2-hour price chart of the S&P 500, which pegged short-term support at around the 850 area and short-term upside resistance around 927.
That very day, the S&P 500 tested the 850 area and then again the following Monday just before the late year-end rally began. At that time, the index didn’t reach the 927 area, though it finally broke out of the consolidation pattern I’ve been writing about for weeks, even reaching 927 on the first trading day of 2009.
The Setup Is In Place… We’re Just Waiting For The Execution
While some of the smaller-cap indexes have triggered daily buy signals over the past couple of weeks, they’re much closer to their minimum targets on the daily charts.
On the other hand, the major stock indexes - the Dow, S&P 500 and Nasdaq 100 - are all set up for daily buy signals. They just haven’t been able to trigger them yet. And even if they do trigger daily buy signals, the way the daily charts are currently set up, they’ll have already reached their minimum daily upside targets.
I can’t remember another time where the minimum target price of a stock or index was reached before the signal occurred. This really is new territory, so we’ll have to see how this one plays out.
After The Targets Are Attained… A Reversal?
Since all these indexes are either at these daily upside price targets or very close to reaching them, we need to exercise some caution, as a reversal is possible once these levels are reached.
Even if the rally continues, the S&P would need to touch at least the 1,017 area to set up any weekly buy signals.
Below is a daily chart of the S&P 500, which looks like it could be forming a bullish, reverse head-and-shoulders pattern. The 90-day moving average and the top of the trading channel - drawn from the May highs - both come in around 995, which indicates that a couple of closes above the November high of 1,008 should be bullish over the longer-term.
Natural Gas Revisited
Back in the August 11, 2008 issue of “Sector Watch,” I profiled the United States Natural Gas Fund (AMEX: UNG), which was trading around $40 a share at the time.
At the time, the chart pattern was bearish, which led to me to suggest that buying put options on the first bounce higher would be a smart move. True to form, after the stock bounced from $36 to above $40, it then proceeded to trade as low as $21.72 on December 22.
Take a look at the updated daily chart of UNG below…
The Tradable Levels You Need To Watch For On UNG
As you can see, the stock has moved higher over the past week. Having suffered extremely oversold conditions during the fourth quarter, this is usually the time of year when natural gas demand increases, so I suspect we’ll see higher prices over the short- to intermediate-term.
Breaking down the numbers… there is shorter-term resistance around $26.25 and then again at the top of the trading channel, which is currently around the $27.40 to $28 area.
If UNG can close above $28 a few times, there’s a good chance that the stock could rise to at least $31.50 - and possibly as high as $37.50. These two price levels represent the 23% and 38% Fibonacci retracement levels. A 50% retracement would take the stock all the way back up to $42.80.
If you’re a short-term trader, watch for price acceptance above that $28 level. If that occurs, you could try playing the long side and then exit the stock if it runs out of steam around the Fibonacci levels I mentioned above.
Alas, the longer-term scenario doesn’t look quite as bright…
Playing The Put Side
As it stands now, the weekly UNG chart is still on a sell signal - with a 70% chance that it will eventually make new lows. Beware for the stock to retreat at any time, but if we get a sharp rally over the next month or two and UNG trades up to the $37 to $43 area, I’ll be looking to buy some put options.
If you’re going to follow UNG - and intend to play it - I’d wait for a sharp reversal to the downside, then buy puts on the first bounce.
That’s all for this week,
Jim
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