October 21st, 2009

Fuel for the Cold Winter Months

I’ve written here recently about the oil & gas complex as possibly the last group to breakout of long-term reversal patterns (see “Mysterious Happenings in the Oil Patch“). Cousins of the group that might be particularly interesting since we’re approaching the winter heating months are the fuels used to heat our homes and workplaces: UNG (Natural Gas ETF) and UHN (Heating Oil ETF). What do these charts look like; I’m including OIL (Oil ETF) for comparison purposes (click on charts to enlarge):

  • UNG: Due to what many say is over-production and the unavailability of storage capacity for the excess, natural gas prices have tumbled. But the price of UNG has fallen even more than the underlying commodity due to short sellers. Prices have begun to firm (note the small cup-and-handle formation that began in August) and there’s a possibility of a short squeeze as sellers start to cover which could drive the price back up to the first resistance trendline at 18.

  • UHN: If you live anywhere other than the sunbelt and use heating oil and haven’t locked in your rate for the winter, then you might want to consider buying a winter’s worth of this ligthly traded ETF (so if you do trade it, use only limit orders). It’s hard finding a more perfectly formed ascending triangle reversal pattern. The characteristic of this pattern is that it very clearly depicts how buyers come in to the stock and overwhelm the sellers at higher and higher levels. They run out of steam at the resistance level but, the theory is, at some point in the near future as the bottom trend line continues to approach that resistance, a breakthrough will occur.

  • OIL: Not surprisingly, OIL has a pattern similar to UHN. If one breaks out, the likelihood is that the other will too. The interesting thing about OIL is that many drillers, service, refiners and marketing firms have clearly formed reversal head-and-shoulders, double-bottom and, yes, ascending triangle, patterns and are ready to breakout when the big money is ready to come in from the sidelines.

So whichever of the Oil & Gas participants interests you the most (yes, don’t forget the large integrated international firms like COP, XOM and CVX) putting some money to work in this sector is prudent.

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  • Manoj

    CFTC has caused the changes in the nature of investments UNG makes.
    Do you still feel that UNG would
    do better. I own UNG (still under water).


  • Guru

    Manoj, I convinced myself with yesterday's post and bought some UNG. It's disappointed me in the past but I'm hoping this time it will work.

  • Anonymous

    You mentioned buying a lightly traded ETF like this with limit orders. How do you place your limit orders? What are your entry rules for limit orders?

  • Joseph Meth

    Interesting you focused on that … limit orders … because I don't, as a general rule use limit orders. The operative clause was "ligthly traded".

    When a stock or etf is lightly traded, the odds are there's a big bid/ask spread. A market order will get executed at the ask price or higher and could be $0.25-0.40 higher than the ask price; that's how far behind the curve to break even you are before you even get started.

    I actively traded stocks or etfs, that spread is often no more than a penny or two. The average investors order of a couple of hundred or thousand shares won't budge the bid/ask as a large institutional order will (a small order of a lightly traded stock will push the ask price higher).

    When you place a limit order for a lightly traded stock somewhere under the ask price at the time, there's a good chance that sometime during the day's fluctuations, your order will be filled.

    If not, you can always chase the stock higher (still with limit orders) and you'll probably get it at the price you would have paid with a market order or a bit higher.

    I haven't read of any hard rules or guidelines for placing orders but these are mine … since you asked.