Keep a Flame Burning for Natural Gas

 | Jun 21, 2013 | 11:00 AM EDT
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The market is getting crushed on nearly all levels this week. The major indices, bonds, and gold have all fallen sharply over the past two days as the larger market kicks off a second wave of selling on the weekly time frame.

The recent action this week in the S&P 500 is similar to the two-wave drop it had on the daily time frame at the end of last month. For the first time all year, we are seeing the confirmation of the larger weekly price correction we had been waiting for all spring. Looking back over prior weekly corrective moves, it's easy to infer that the bulls will continue to have a rough road ahead into summer. The next major weekly support in the SPDR S&P 500 (SPY) isn't until $156. So, even a minor exhaustion-driven bounce intraday into the weekend will likely come under pressure again next week.

SPDR S&P 500 (SPY) -- Weekly
Source: TradeStation

With further downside on the horizon in the overall market, it's difficult to be excited about strategies on the long side (unless you are playing the inverse ETFs and ETNs). Another notable exception, however, first caught my eye at the end of last week: natural gas, or more specifically, the U.S. Natural Gas Fund (UNG).

As represented by UNG, natural gas has fallen sharply off the highs from earlier this year. That selloff, however, has been nearly textbook from a technical perspective. There were two measured moves that took it into initial support at the end of last week. I had even considered it as the core position for one of my columns at that time. What held me back, however, was the technical aspect.

U.S. Natural Gas Fund UNG -- Weekly
Source: TradeStation

While UNG has experienced two waves of correction off highs, the strength of the selling means that a change in momentum would be necessary (in most examples of this pattern) in order for the fund to experience strong follow-through on the upside that lasts for more than a few days. Typically, the price action following this type of two-wave correction is a continuation of the downside. But it's within a narrow trading channel, whereby a series of slightly lower lows serve as traps for the bears while the levels flush out weak bulls. This will then open the door for a stronger break to the upside that will generally allow the security to return to the price congestion that takes place between the two larger downside waves. I have indicated this as "resistance" on the chart below.

U.S. Natural Gas Fund UNG -- Daily
Source: TradeStation

Over the next couple of weeks, I will be watching those tests at the lower end of the 90-minute and daily charts. Intraday, it will be likely to see smaller trend swings occurring as pairs on the 90-minute time frame as prices swing between upper and lower levels of the trading channel. Ideally, the upswings will be similar or stronger than the downswings in this channel (indicated as a hypothetical channel on the chart above). Timing a bounce off a third low in the channel will typically be more successful for a larger daily rally than a move off a second low. Lighter-than-average volume throughout, particularly if it declines as selling slows, would further enhance this price development.

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