The natgas short couldn't have played out any better. UNG gapped lower on Monday and continues to bleed as of mid-day today. (See initial Feb 3 report below)
I took profits on my HND.TO position earlier this week @ 9.12 (+1.34) and 9.33 (+1.34). After UNG hit a low of 5.43 and bounced I took profit on the balance of my HND.TO @ 9.38 (+1.39). The trade averaged gains of almost 20% in less than one week.
With the extreme cold much of the Northeast is getting right now, plus another EIA report to be released tomorrow morning, we could definitely see natural gas prices bounce from here on short covering. But I am not convinced we have seen the lows yet.
Risk/reward does not warrant initiating new swing trades here. I went long a few UNG this morning @ 5.49 looking for a bounce, but will be out of that trade win or lose by tomorrow morning at the latest.
Short-Term UNG Target: 5.35-5.50 (Feb 3)
Natural gas had been looking pretty strong since breaking out of a downward channel in November. However, in late January the US Natural Gas ETF (UNG) staged a failed breakout above 6.40. And ever since it has been on the defensive.
- The chart was already looking weak. I had been watching natural gas and waiting for a bounce to sell into. The 20 day moving average was a natural resistance level.
- Weather has been cold. That's bullish, right? Yes, but the problem is that EVERYONE already knew that it was cold. Therefore, in my view, there were likely a lot of weak longs still hanging on. And weak longs always make for a vulnerable stock (or commodity). Selling natgas once the cold hits is analogous to "selling the news".
- The market was looking for a steep storage draw at 10:30am. Reuters was calling for 190 and some forecasters were looking for as much as 217. My analysis said that while it was cold, it was unlikely to result in a draw near 200. A weaker than expected draw should see a bearish reaction.
- No matter what the draw, there is still an awful lot of gas in storage against virtually any metric.
Technically, UNG put in a bearish reversal candle today, and looks set to close beneath its 20, 50, 100 and 200 day moving averages. To me this points to a technical target of 5.35-5.50 over the next several days. Only a move back above 6.10 would reverse this bearish view in my opinion.