Is Natural Gas About to Breakout?

Natural gas has been in a period of consolidation for the last two months. However, it appears we may be getting ready for a breakout based on the recent price action, bullish COT data, seasonality and positive divergences that are currently taking place in the nat gas market.

Below is a chart of the United States Natural Gas Fund ($UNG) going back the last nearly ten months. After the 22% drop from the last high made in June, price has been trading in a fairly tight range. This type of consolidation can produce some large moves as if it were a coil that was being pushed together. While this consolidation has been taking place, the Relative Strength Index has been putting in a series of higher lows. This bullish divergence has also led to the RSI making a higher high after Monday’s close.

In the bottom panel of the chart we have the On Balance Volume Indicator which simply adds the volume on positive days and subtracts the amount of shares traded on negative days. This tool can help us see if there is a bias towards buying or selling. Since the indicator has been rising its July low, we know that more shares have been traded when $UNG has been advancing compared to when it has been falling – a positive sign for nat gas bulls.

We’ll see if these bullish indicators of momentum and volume lead to price breaking above its August high.

UNG

Commitment of Traders 

The next chart I want to show is of the Commitment of Traders (COT) data for Natural Gas. The red line in the bottom panel of the chart shows the Commercial Traders, which are often company’s that deal with natural gas within their own business, so they are often considered the ‘smart money’ within a market. After going net-short the commodity earlier this year right before price peaked, the Commercial Traders have been slowing building back their net-position towards a historically high level. Even during this period of consolidation, the ‘smart money’ appears to have been picking up contracts in Natural Gas.

Nat gas COT

Seasonality

This final chart comes from Signal Financial Group and shows the 10-year seasonal trend for Natural Gas. Interestingly enough, the 5-, 10-, 15-, and 20-year seasonal trends all mirror one another, which in my opinion helps re-enforce the significance of this seasonal pattern. Like we have seen somewhat this year, price has put in a low in early September while showing slight strength during the last month. What catches my attention with this seasonal study is the large move towards the end of October that crates the historical first point of a double top before price has weakened into year-end and the first few months of the following year.

Nat gas seasonality

So it appears we have price getting ready to breakout of its two month consolidation. While at the same time momentum and volume are creating bullish divergences and the ‘smart money’ has been increasing their net-long position in Natural Gas based on COT data.

(At the time of this writing my firm holds shares of UNG in certain client accounts and may sell those holdings at any time. However, this is not a recommendation to buy or sell UNG, other natural gas-related or any investment vehicle.)

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Bullish Price Action For the United Kingdom

While Scotland votes on Thursday whether to breakaway from England and declare its independence, the price action for the United Kingdom equity market is presenting an interesting setup.

The iShares United Kingdom ETF ($EWU) has not had the best year so far, as it currently sits basically flat for 2014. However, the most recent decline has created a possible double bottom in price. At the same time we can see the Relative Strength Index put in a higher low on the re-test of support in shares of $EWU. This creates a bullish divergence and a sign that price may be preparing to change direction.

On the bottom panel of the chart below we have the On Balance Volume indicator. This tool simply adds and subtracts the number of shares traded each day based on whether price closed up or down. When $EWU re-tested $19.90 the decline that got it there was on much lower volume. This means there might not have been much support to take prices lower with fewer shares being traded on the downside.

As price gets support from both momentum and volume, I’m now watching to see if it can break above its falling trend line, which is currently right around $20.40. While the vote in Scotland will likely have an impact on British equities, it appears the latest moves in price, momentum, and volume are showing a bias to the bulls.

United Kingdom

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Weekly Technical Market Outlook 9/15/2014

As the bond-stock relationship continues to evolve, we saw a big drop in bond prices while U.S. stocks also took their punches. The S&P 500 ($SPX) finished the week down 1.10%, Small Caps dropped 0.87%, and Commodities ($DBC) continued their slide with a -3.5% move last week.

In last week’s Technical Market Outlook I showed a chart of the ratio been the U.S. Dollar and Emerging Market Currency Bonds and how this ratio has often led the Treasury market. The ratio between the Dollar and these Currency Bonds had created a divergence, which I noted may lead to the 10-Year Treasury Yield also rising. In fact, last week we saw the Treasury yield advance by 6.22%, the largest one week increase since September ’13. The Relative Strength Index inched into ‘overbought’ territory on Friday for $TNX, so I’m curious if bond bears are able to keep the party going or if we see some consolidation or decline in yield this week.

Trend

While we saw a 1% drop in stocks last week, the trend is still positive for the S&P 500. Price is now under its 20-day Moving Average but we are still firmly above the 100-day MA and the rising trend line.

Trend

Relative Rotation Graph

I’ve shown the Relative Rotation Graph a couple of times on the blog, and every couple of weeks I’ll do an update to see how the sectors are moving. As a reminder this tool shows the momentum of the trend of relative strength and is plotted on the Y-axis and the trend of relative strength is then plotted on the X-axis. The sectors typically move in a clockwise fashion as their relative performance vs. the S&P 500 rises and falls and the momentum of that performance also rises and falls. Click the hyperlink above to read more.

Health Care ($XLV) and Technology ($XLK) continue to advance in the ‘Leading’ category. While Financials ($XLF) have not been a stellar performer this year, it’s been making good improvement over the last several weeks. I’ll be discussing this sector later in the post. Energy ($XLE) which had been the best performing sector for a couple of weeks this year, has been moving fast as it left the ‘leading’ category and has fallen hard in the ‘weakening’ category.

RRGBreadth

Last week I discussed the divergences that were taking place in both breadth and momentum and how they could cause some headwinds for stock prices but were not extreme divergences and thus were unlikely to be signaling major bearishness. The decline in the Advance-Decline Line has continued. What concerns me is the short-term trend line that had acted as support appears to now be resistance.

Breadth

Momentum

Like breadth, momentum continues to weaken as prices fell last week. The Relative Strength Index (RSI) remains above support that was created on previous declines and currently is testing its midpoint which may act as support – we’ll see.

Momentum

Financial Sector

I tweeted out on Friday the chart below, but I wanted to also show it here today.  The following chart is the relative performance line between the Financials Sector ($XLF) and the S&P 500 ($SPY) on a monthly basis going back to 1999. The top panel shows the width of the Bollinger Bands around the ratio of these two ETFs. Typically when the bands contract a large move follows. Think of a coil as it contracts. We are now seeing the Bollinger Bands for this ratio contracting to the tightest range since 2007 and 2004. This led to a massive under-performance of Financials and of course the eventual Financial Crisis in 2008.

So does this chart signal a coming crisis? Of course not. What it does tell us is that a possible large move may be coming as the Bands tighten. However, we can not use the width of the Bollinger Bands to estimate the direction of the move.

XLF

Regional Banks

In the Relative Rotation Graph we saw that $XLF has been improving and in the above chart we can see the Bollinger Bands for the ratio between $XLF and $SPY has narrowed considerably. Now lets take things a step further and look specifically at Regional Banks ($KRE).

Again, we are looking at the relative performance against the S&P 500 with the ratio of $KRE and $SPY. At the end of August we saw this line test its previous low in May ’13. We also began to see a positive divergence in the Relative Strength Index (RSI) indicator, which is shown in the top panel of the chart below. This told us that we may see a change in trend as Regional Banks improve in relative performance. Price eventually confirmed the bullish divergence in momentum and has now broken its falling trend line as $KRE outpaces $SPY.

KRE60-Minute S&P 500

Last week I highlighted the negative divergences that were being created in the RSI and MACD momentum indicators and that I was watching to see if 1990 could hold up as support for the S&P 500 on the 60-minute chart.

We ended up closing out the week under 1990 as price created a falling channel. While the 1% drop in the S&P last week is far from terrifying, we have yet to see momentum break into ‘oversold’ territory as it has during previous dips, so it’s possible traders may not be doing selling.

Some may see the lack of lower lows in the RSI indicator as a possible bullish divergence, and they would be correct, however divergences that take place between 70 and 30 are typically less reliable in my opinion but I suppose it’s still good to note.

60 minLast Week’s Sector Performance

Last week the Technology sector and Financials showed to be the best performers. While Energy and Utilities were the worst performing sectors. It’s interesting to see the two sectors that had been the strongest during the start of the year now being sold off. This is a great example of traders rotation out of strength and into the under-performing spaces like Financials.

week sector

Year-to-Date Sector Performance

Health Care remains the best performer for 2014 and Tech has now moved into the number two spot for the year, edging out Utilities. With these three sectors showing 5-8% out-performance of the S&P for this year, they have also moved well ahead of the other six sectors.

YTD sector

 

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.