UNG Natural Gas Update for November 7

Nov 7, 2009: 10:34 PM CST

I wanted to do an update post on the infamous Natural Gas fund UNG, now that it has (almost) completed a test of the prior lows as mentioned in my prior post entitled, “A Weekly and Daily Chart View of UNG on October 28th.

Let’s see the daily chart spanning back to the beginning of 2009… and witness the stellar drop from $25 per share to $9.

In the prior post on October 28th, I remarked:

“If the prior trend continues, then we will be looking for a price move down to test $9.50 or $9.00 in the next few weeks – provided that the $12.00 level holds as it seems to be doing as resistance.”

The $12 level did indeed hold and price did fall to close Friday just a hair above $9.50 and could test the September lows at $9.00 to try for a ‘double bottom”… or worse yet a new price low.

Beyond the price pullback to the $9.50 level, I wanted to share a lesson about the arc failure pattern in August.

Even without me drawing the arc, it is clear that price was attempting to form a “Rounded Reversal” or “arc” pattern formation (also called a “Saucer” or “Scallop”).  Generally, these are bullish reversal patterns that form near the lows of a major price move.

In general, it’s impossible to call the exact bottom of a rounded reversal pattern, but more than not they do lead to trend reversals.

However, when they fail, they can fail very hard, as the example above in UNG shows us.

UNG began to form a rising arc, looking like the pattern was complete in June and August 2009… but when price broke beneath the arc, a down-move was sharply accelerated by this pattern failure.

It’s one of many examples where a common pattern forms and when the pattern fails, throwing the traders who expected a reversal off balance, it often leads to a swift, sudden and often powerful move in the OPPOSITE direction than is expected… in part due to stop-losses being triggered.

I think this is an excellent example to reference for your studies on a failed “Rounded Reversal” or arc formation… and how powerful price moves can occur at these failures.

To see a successful example of the “Rounded Reversal” leading to a trend reversal in Crude Oil, see any of the following posts in chronological order:

December 30, 2008:  Volume Surging in USO and DXO Oil Funds

January 20, 2009:  Possible Reversal Up in USO Oil Fund and Crude Oil

February 3, 2009:  Rounded Reversal Taking Shape in Crude Oil

March 21, 2009:  A Quick Look at Crude Oil and the US Dollar Index (where I called a target for Crude Oil to be at least $70)

The Rounded Reversal is one of my favorite patterns, as it is often very easy to spot and trade.  However, there is no pattern that works 100%, and in the event that a popular pattern fails, it can leave you an even better opportunity to trade in the opposite if you are aggressive and nimble enough to do so.

Let’s see if price can form a double bottom on a positive momentum divergence… or if the pervasive downtrend will crack prices to yet another new low.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

6 Comments

6 Responses to “UNG Natural Gas Update for November 7”

  1. tgarfield Says:

    UNG is troubling to chart. First it does not track the NAV very well due to the significant premium from the lack of share creation. Share creation has resumed however the rules on baskets are not simple any more. Direct futures are not allowed, only swaps. Significant value on UNG was lost from contango. That is lost and does not come back making historical charts inaccurate. The chart of $NATGAS is a completely different chart. I wouldn't buy UNG unless $natgas said to, unless UNG said to and unless I had an idea of where and open interest on the futures was going. I don/t think UNG is a simple trade. The $NATGAS chart rolls months at different times than UNG making some of the comparison difficult.
    http://stockcharts.com/h-sc/ui?s=$NATGAS&p=D&b=

    Even with the chart you show, UNG is still overvalued compared to it's assets. Backwardation generally starts to kick in some on the march contract (shown in the next 10 years of futures). The contango effect will be lessened but this will come with falling prices. Until interest rates increase, which should help cut contnago on all commodities, ETF commodities are a hard trade..

  2. Dan de Man Says:

    Hi Corey,

    I bet double bottom. I covered half my short position on Friday. BTW big black candle on SLV today, as well as bearish divergance.

    Have a great day!

    Regards,
    Dan

  3. terlyn Says:

    Here is an article dated November 9th, that discusses the dislocation in commodity markets being caused by a rush into commodity ETFs:

    http://www.minyanville.com/articles/exchange-tr

  4. stephen22 Says:

    I would like to add that UNG shares shed roughly 2% Monday morning, extending a lengthy slide beneath resistance at its 50-day and 100-day moving averages. The security has given up about 65% of its value during the past 52 weeks, and it briefly dipped into single-digit territory earlier this month.

  5. terlyn Says:

    Here is an article dated November 9th, that discusses the dislocation in commodity markets being caused by a rush into commodity ETFs:

    http://www.minyanville.com/articles/exchange-tr

  6. stephen22 Says:

    I would like to add that UNG shares shed roughly 2% Monday morning, extending a lengthy slide beneath resistance at its 50-day and 100-day moving averages. The security has given up about 65% of its value during the past 52 weeks, and it briefly dipped into single-digit territory earlier this month.