I’ve been trading Nat gas since 2010 . This commodity is a pretty good one to trade technically.
Recently, Nat Gas broke out of a large right angled triangle. Anyone who has read my book Sideways will know that this is a consolidation pattern. Recall that consolidation patterns can be traded in one of two ways.
- You can either trade within the pattern – from the horizontal support up to the declining trendline.
- Or, you can trade AFTER a breakout. A bullish breakout through the upper trendline implies a long trade, and a bearish breakout through lower horizontal support implies either a short sell/ inverse ETF trade.
One trick of the trade when it comes to triangle breakouts is to measure the distance from the widest part of the triangle (left side of the chart) and extrapolate that move forward (upon a breakout) as your target. The theory is that the security has illustrated a certain level of volatility in the past. By extrapolating that volatility forward, we can predict how much the security might move. Its past volatility is a reasonable estimate for how the security might act again in the future. After all, traders pushed the security aggressively by that degree of price movement in the past – so it makes sense they might do it again.
On today’s chart, you can see the left side of the triangle was measured as a 33.9% move from the horizontal support line to the highest point in the triangle. If we measure that same 33.9% from the recent breakout point of approximately $3 – you get a target of $4. Guess where Nat Gas sits right now? It’s at around $3.80, which is within spitting distance of the measured move target.
Given the measured move projection of $4 in relationship to current prices, the current seasonality for gas (which is neutral), and the overhead resistance which lies at $4 – right at the top of the left side of the triangle—I’d avoid this trade.
It’s all about discipline
Thought you guys would appreciate the article published in Wealth Professional Canada Magazine. I was called by a reporter of the magazine – not to cover some technical market outlook – but to talk about how I translate my investment discipline into my other passion: time trial bike racing. There are many similarities between the two disciplines – including a quantitative approach to analysing the race course or market environment, and searching for every edge possible to win a race/ or to win a trade. Hope you enjoy this short feature, and my photo suffering as I approach the last kilometer of a race.
6 Comments
Hi Keith,
Thanks for the article. Just curious , what ETF did you buy to invest in natural gas ? Did you buy UNG or something like HUN.to which is very low vol, and what was your experience like? Did you get your fills relatively quickly either way …and at the prices you expected?
thanks!
Keith
The first time I traded it – I used UNG and it was a good trade
The next time I bought an individual stock (ALA-T) which is a “gassy” producer. It was less successful. I have found that the producers of oil, gas, gold, are less true to the underlying–this is often due to production cost, and sometimes a catch-up that never happens for the stocks. So I’m now becoming convinced that I’d prefer to mainly focus on more direct commodity ETF’s like UNG, GLD, etc
Keith – some unprecedented stuff in NG – it moved to almost $5 and is now back down at $3.90 within 2 days. From your experience on this wild commodity, what should one look for on entries/exits and is there a timeframe best to use? I would love to learn more about how to trade this. Thank you.
Good question Jim
I’d stay to shorter timeframes with this and many commodities. They move quickly, as you note. Think in terms of weeks – to just a few months at the most- for most trades.
Good morning Keith,
As ‘old duffer ‘ cyclists , we are VERY impressed with your efforts on the bike.
WE can keep that pace as well … for about a minute !!! Good to hear that as a fund manager you employ the same skills that you do in your time trials.
A recipe for success.
PS nice bike !
Good luck…
Donna and Barry (Victoria)
Hey thanks Donna
Yeah, I have a few bikes- all specialized for the different events I do. That one is my TT bike, which is the type of racing I tend to do well in–but I do lots of different events that employ different bikes.
I have a race in February in Florida that is a classic road race–its 100 miles (162km)–this is out of my wheelhouse (long races are not usually the types I do well in) but its good to do different events to challenge yourself as an athlete.