Looking At UNG Natural Gas Fund And Divergences

Similar to the chart of Crude Oil, let’s take a moment to see the structure of the US Natural Gas Fund ETF - UNG (UNG) both on the weekly and daily charts.  There’s some interesting divergences that might be of interest to you.

UNG Weekly Chart:

The Fund started trading in mid-2007 during a sharp run-up in both crude oil and natural gas prices, and UNG investors were rewarded handsomely in 2008 but all investment gains and more were wiped out in the 2nd half of 2008… and so now 2009 begins.

Price broke beneath key support from the 20 and 50 week EMAs before plunging further all the way down to $22.50 per share - a move few if any foresaw accurately coming.  The EMAs ‘crossed bearishly’ in August, though it’s generally better to exit prior to the averages actually crossing.

I did want to draw your attention to two divergences, or “non-confirmations.”  First, volume surged in August 2008 which confirmed the lower prices and hinted - along with the new momentum low - that lower prices were yet to come… and they sure did.

However, as price has fallen steadily from the $32.50 ‘volume spike’ low, volume has steadily drowned off as price continued to make new lows - an interesting non-confirmation.  Remember, lower prices on falling volume generally is bullish.  Look at the volume now after the spike.

Also, the momentum oscillator has consistently been registering a positive momentum divergence, which is often the case after a large price spike, but still it’s a signal not to be ignored.

So we have new price lows on a non-confirmation from both volume and momentum… that’s bullish.  However, don’t underestimate the power of the prevailing downtrend.  Let’s zoom to the daily chart for additional clues.

UNG Daily Chart:

This chart is interesting in that it shows a healthy swinging market with decent swings and counter-swings.  Notice each time price retraced to the falling 20 day EMA, sellers stepped back in.  Only once - in November - did buyers push price for a close above the EMA though it was quickly swiped back down to new lows shortly after.

We’re seeing price close yet again above the falling 20 day EMA, which would be the first step to any sort of reversal or recovery (or even short-term upswing).  If bulls can hold, the next zone to test would be around $26.50 which is the falling 50 day EMA.  Breaking above that would be extremely bullish, and a break and close above $28.00 would reverse the trend (on the daily chart) back to the upside.

Again, we see numerous positive momentum divergences, but do be careful interpreting oscillators and most other indicators in a prevailing (strong) trend move as we have here.  Eventually price will snap back to the upside but it’s often best to wait for confirmation before going long.  Still, be alert to the possibility that this could happen sooner than later.

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