Wednesday, November 11, 2009

Natural Gas and UNG

Natty has had a pretty good sized move down in the Dec contract, not unexpectedly. As mentioned many times late Sep and early Oct:
"Over 5.12 and 5.57 looms large.That represents a significant cluster of resistance. Given the near record inventories, and the seasonal tendency for an intermediate term pullback from Oct on, the downside risk following the next leg up will be HIGH.
Additionally there is the potential for the pullback to last several months into the seasonal early winter low. If for instance that were to be a not uncommon 50% pullback on the spot chart to roughly 4.00, that would represent some real pain for holders of the Feb. contract." Didn't quite get to 5.57 which also is not surprising.

The .382 retrace on the spot chart is at 4.23, actually a rather modest pullback from 5.35 , but note that would be a new low for the Dec. contract. That is probably the story of the next few weeks, if not months: reconciling  the two charts. Given the above mentioned factors rallies will likely be limited to resistance at 5.35/ 5.57 and the Fib. retrace .618 of the move down from there at 5.00. Natty has downside risk to 3.53, the .618 retrace of the spot move up, as well as a previous low.

UNG holders must be enjoying the current performance of the ETF designed to track NG spot month. Note the chart is log scale.


The current UNG roll is shrinking the NAV by 9%. As it makes new lows will holders start to capitulate?
Even the most obstinate must be recognizing the limited upside performance potential. It took a NG rally of 122% , from 2.40 to 5.35 , to get the UNG from $9 to $12.  Does anyone think that the NG will rally 122% from here to $10.00?  So $12 on UNG from here is really unlikely. Guessing that will add sell side pressure to NG at some point.

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