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The Art of Catching Bottoms

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Taking UNG as an exemplary case study.

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Dear Professor Smita,

Just a quick thought on Natural Gas (UNG): Isn't the real expectation for this one to make a new low, rather then to bottom? I say this as a guy who tried to catch the bottom in the low 30s, mid 20s, and high teens before deciding to short the next rally into resistance. All those spikes had "potential bottom" feels, yet all went to new lows, so I shorted this spike - had to cover, but re-shorted yesterday. I noticed 3 things:

1. Every spike led to a new low thereafter, continuing this picture-perfect down trend;

2. Every spike led to really good traders leaning long because it "looked" like a bottom (and I certainly played too);

3. This is totally unscientific, but this downtrend is so relentless, it seems to "need" single digits. I noticed Mike Paulenoff, you and many other technicians are looking at this as a buyable pullback. I'd love to know your thoughts.

-Minyan Josh


Dear Minyan Josh,

Thanks for your note. I honestly try not to color my reading of a technical picture with expectation; I only let the evolving charts guide. (On that thought, have you ever noticed how holding any position makes your personal take on the charts biased?)

The latest move in natural gas was the first time that:

  • It broke through the downtrend channel;

  • It went above the 10, 20 and 50 DMAs;

  • It was all supported by really good buying interest;

  • It came out of a low volatility after enduring a long time in narrow Bollinger Bands.


I normally short retracements from such vertical moves, too. But in the last few months, cognizant of the change in character of the market, I don't really try to play both sides of the trade.

This was the first time UNG showed a change in character. But as I often say, the real test of strength comes when support/resistance is tested .

It reminds me of excellent words by Martin Luther King: "The ultimate measure of a man is not where he stands in moments of comfort and conveniences, but where he stands at times of challenge and controversy."

I'm a little concerned about the pickup in downside volume and retracement below key Fibonacci levels, but the real test remains the action close to the old lows.

Lastly, these are all only probabilities, and it's always essential to have a backstop in the form of money management. And, it's good to know I'm in the company of great technicians like Michael Paulenoff on this. Interestingly, many of us are seeing similar pictures from different angles!

Sincerely,
Professor Sadana

Position in UNG

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