Friday, August 21, 2009

Natural Gas Commodity Prices Drop to a 7-Year Low!

Natural gas closed yesterday (Aug 20,09) at 2.945 per million BTUs on NYME, the lowest closing level for a front-month contract since August 12 of 2002 according to the CME group. The next possible support target is 2.52 per million BTUs, which is the level of March 2002. August has historically been a bad month for Natural gas futures as this 17-year-study chart shows.

(Click on image to enlarge)

The price drop was exasperated by the rise in supply as the EIA reports a rise of 55 billion cubic feet to stand at 3204 Bcf, which is 562 Bcf higher than last year at this time and 513 above the 5-year average. Barring any storms, the glut of supply will continue to hurt prices. – data source MarketWatch

The economic recession is also tampering demand, but new clean energy politics is on the table. T. Boone Pickens has been lobbying congress to use natural gas as the clean-energy solution for vehicles to rid our dependence on oil. “He touted natural gas as the best alternative vehicular fuel because it’s a domestic resource that reduces our foreign oil consumption, and enhances America’s energy security; clean (NGV vehicles emit up to 95 percent less pollution than gasoline or diesel vehicles); less expensive than petroleum and hydrogen; and safe (lighter-than-air compressed natural gas is nontoxic and disperses quickly, and has a higher ignition temperature than gasoline and diesel fuel, which reduces the chances of accidental ignition).”

There isn't a pure trading vehicle for the Natural Gas Commodity, these ETFs are the closest thing available:
Natural Gas Industry: $FCG
Natural Gas Commodities futures: $UNG
Oil and Natural Gas exploration and production: $XOP
Oil and Natural Gas equipment and services: $PXJ


Sunday, August 16, 2009

The Power of Technical Analysis; A Case in Point Study of the S&P500 Chart.

Technical analysis is a graph of the psychology of the market and should be part of every trader and investor’s arsenal if they don’t want to become road kill on Wall Street. It is a guide to the future empowered by the past and based on human psychology.

Case in point is the SPY500 starting back in 2004 in mid-bubble times. Note that there are other Technical factors contributing to the success of the patterns, such as the 50MA crossing above the 200MA in mid 2004, then below it towards the second half of 2008 and a few others.

(double click on the image to enlarge)

Pattern 1 (orange): This is the key pattern here, The Bump-and-Run-Reversal pattern, BARR (formerly and aptly known as the Bump-and-Run-Formation - BARF) started forming with a speculation phase in the mid 2006 when the market psychology was euphoric and gave a new meaning to irrational exuberance. This pattern was at disbelief at the key breaking levels, but finally succumbed to it. The psychology behind it is valid. Pattern 2 below is also part of the BARR pattern indicating the end of the speculation phase.

Pattern 2 (orange/white/blue): The double top (white) or a Head and Shoulders (blue) topping patterns depending on where you draw the line. Both are bearish topping patterns and both break at around the same level and measure to the same target. This is a sub–pattern that is part of the BARR pattern above, which takes a long time to develop in this time-frame.

Pattern 3 (blue): The typical Head and Shoulders pattern at an angle.

Pattern 4 (yellow): unveiling as we speak, the reverse head and shoulders topping pattern on the weekly time frame. Will it clear the key gap resistance and move to reach its target of ~1200? bounce down from the ~1080 resistance, Or will it stall and create another pattern that will reveal itself with time? (All of the above are possible on different time frames) Plan for all scenarios, and remember that being out of the market at times is also a plan to follow.

You can read more about the actual psychology that forms these patterns in any good technical analysis book. And you can be sure you will see this chart in the next book about The Crash of 2008, in the technical analysis section, maybe my own.

Of course hindsight is 20/20 and it’s easy to talk about these patterns of the past when they have already been drawn, but hindsight is what gives us the confidence in these patterns, especially in the longer time frames, enough confidence for that above than 50% probability we all seek in our trading. So when I see a pattern emerging I create my thesis around it, and trade it, while being cautious around the key levels where I typically look at other indicators to gauge the pulse of the market.

Swing and day traders are in the business of predicting the next move to make money, and technical analysis is the key tool for that.


Thursday, July 16, 2009

It's a Matter of Time..

Time is a key piece of the puzzle in technical analysis. A lot of the chart analysis you see on the stocktwits stream are for a specific time frame, usually that of the chartist, and not necessarily yours. So before you jump into that trade, check the time-frame of the chart and see if it agrees with yours.

If you are a day trader then you’re looking at the price action down to the minute and don’t care what will happen tomorrow. If you are a swing trader, then you’re looking at the 15/60 minute charts to confirm your thesis and time your entry, but mainly focused on the last few days up to a few weeks of that stock’s action, and perhaps pan out to see where they fit in the big picture. If you are a longer term trader then many weeks, months and years is your target, and you are really focused on the fundamentals and the economic environment at that level, and technical analysis becomes an auxiliary tool and not your main focus.

Due to the time frame differences a lot of people will have conflicting views of the same financial instument, and be both correct. So always clarify your time frame before you make up your mind.

Finally, thanks to all those who chart and take charting requests, I know that the time and effort put into that is significant and the education by example provided to others is much appreciated.

Peace and profits to all.

Monday, June 29, 2009

Mistakes even the best of us make: Not keeping the trading vehicle in mind..

Reading Wall Street Cheat Sheets excellent article on beginners’ trading mistakes today inspired me to write this little thought dump for all of us to benefit from, beginner and expert traders alike.

1) When I first joined Stocktwits in the beginning of April 09 many traders were using technical analysis on the Direxion Triple ETFs, which reflect triple the daily price movements of indices of specific sectors or markets. FAS and FAZ of the triple financials were favorites. The issue arises from the fact that the math behind the movement of these vehicles creates false chart patterns and misleading technical indicators. These ETFs will not return to the same values when the underlying index does due to the asymmetrical up and down movement of the ETF prices. This is one of many issues that make these ETFs not amenable to technical analysis. For further details refer to the prospectus of these ETFs. Hopefully this will save people some money and agony.  There is an art to trading these leveraged ETFs in addition to day trading vehicles, and I may do another post on how to trade these.  Meanwhile, if your money manager is someone who held these for a long time for whatever reason, consider getting another money manager is not responsible enough to manage your money. 
Only use the underlining index of these triple ETFs for charting and technical analysis.

2) The second and most recent issue that is popping up on stocktwits is related to commodity ETFs. The issue comes when traders look for the ETF volume as a valid TA signal especially during a chart breakout as we do for stocks. This is not correct as the volume of the ETF trading vehicle simply means that more traders are interested in buying the ETF itself and does not in any manner reflect the economics of supply and demand of the underlying commodity (volume of the ETF may inadvertently cause pricing issues for the commodity, but this issue is not the scope of this article). Simply said: Volume breakouts of an ETF chart bears no information other than interest in the ETF itself.  The only information that is relevant in TA is the actual commodity price and chart when evaluating your ETF purchase based on TA.
Study the underlying commodity for TA to trade the corresponding ETF and not the ETF charts themselves.

I hope this was educational and helps clear up some of the common misunderstandings of trading ETFs. I usually tweet my stock research around midnight Pacific time, but you can always find my setups on stocktwits and sometimes charts posted on when time allows.

Peace & profits to all,