China Wants Trump’s Gas! (UNG,QQQ)
Two weeks ago we issued a long term bullish call on natural gas, a sector that seems to endure a new shot-kacking every time we review its chart.
The damage, as we wrote in our May 25th letter, It’s perfectly Natural, began back in 2008, when gas prices melted down alongside stocks in what’s come to be known as the Sub-Prime Mortgage Crisis.
Since that time, the United States Natural Gas Fund (NYSE:UNG), a loose proxy for NYMEX Henry Hub, front-month contracts, has been dragging its arse along the rocky bottom, bumping up here and there when the silica got a bit sharp, but basically going nowhere.
Our article proposed that a host of factors were now conspiring to put an end to the UNG hemi-rip that we’ve experienced over the last half decade, and that a significant price boost was now in the offing.
Two points… if you’ll permit.
- First, the dollar looks weak.
As we’ll show in the chart below, even if we get marginal selling over the next week, dollar weakness could turn into a dollar rout. Should that occur, all commodities will experience a boost, as nearly the entire asset class is priced in U.S. paper. When the dollar retreats, commodities as a whole tend to advance.
Recent performance in gold provides a perfect example and could be indicative of where commodities may next be headed. The shiny metal broke to a new intermediate term high on heavy volume this Tuesday as all its moving averages also turned higher.
Take a peek –
- The second point relates to a geopolitical flare-up in the Persian Gulf that was completely unexpected at the time we penned our UNG recommendation.
We’ll outline the issues at play there in a moment, but first the dollar.
This is the U.S. Dollar Index (DXY) for the last six months, a period marked by continuous downward pressure on the buck.
As you can see both RSI and MACD indicators have been submerged below their respective ‘waterlines’ for the better part of five months now (in green), a sign of continued bearish momentum, and two of the dollar’s four moving averages have also rolled over, including the all-important 137 DMA (in blue).
With price now trending below all her moving averages, we’ve little to commend to dollar bulls at this stage, outside of the scant hope that there may be a retracement to test former support (now resistance) at the long term moving average at 98 (yellow line).
The outlook is clearly bearish, but what’s more troubling is what’s shaping up on the weekly chart.
There, we find the buck at the threshold of a series of significant, negative technical events.
Three years of weekly data show the tremendous rise in the dollar through the fall and winter of 2014/2015. Since then, we’ve seen higher highs as late as this January, but today the situation appears to be breaking down.
- To begin, three waves higher from the summer of 2014 are now complete (in red), indicating a retrenchment is highly likely,
- We have MACD poised to take on water in the next few days (in green), offering a technical confirmation of RSI’s bearish action beginning in mid-April – another wholly negative signal, and
- Perhaps most important, price is now perilously perched on her all-important 137 week moving average (in black), a line it hasn’t touched since crossing higher in July of 2014. During a healthy bullish run, price would normally retrace at least twice, perhaps three times to that line. In our case, it has taken nearly 36 months.
If we get a bounce, of course, all’s jim-dandy. But if the dollar breaks below her 137 week moving average and separates from it, we’ll very likely see a decline to the next line of support at 89, as the blind lead the naked in a panicked rush to unburden themselves of greenbacks.
A weak dollar will put strong upward pressure on UNG, and reinforce our rationale for getting long.
And then came Qatar…
Our second point revolves around the latest diplomatic moves in the Arab world to isolate Qatar, the WORLD’S LARGEST SUPPLIER OF LIQUIFIED NATURAL GAS.
A group of very powerful Arab countries around Qatar, including Saudi Arabia, UAE, Kuwait and far flung Egypt, launched what essentially amounts to a naval blockade of that country.
To that in just a second.
First, though, you remember that we outlined for you that net speculative positions in natural gas flipped from short to long for the first time in ELEVEN YEARS three weeks ago, at the same time that CALL purchases in UNG surged outrageously, prompting us to write,
And we think we have!
Remember, too: less than a month ago President Trump made a deal with the Chinese president that, according to CNBC, “threatens to break Qatar’s grip on LNG pricing in the critical Asian market” by opening U.S. gas to the Chinese.
What transpired directly thereafter was a Trump trip to the Middle East to apparently cap the deal. The Saudis and Egyptians got military hardware, the U.S. got a closure of the Qatari gas spigot.
Now America sells gas to China.
And they all lived happily ever after…
The Qatari episode, as this will one day be known, will also serve to pressure gas prices higher – over the near term.
And it’s precisely to that eventuality that we return this week for a trade.
But first, we have one trade to report.
It was opened on May 18th in a letter called Low Rider. There, we urged you to consider the purchase of the QQQ June 2nd 135 PUT for $1.26.
And it didn’t work. The PUT expired worthless and we lose the full premium – $1.26.
We’re going back into the gas tank for this week’s effort – long/short against the buck, as represented by the PowerShares US Dollar Bullish Fund (NYSE:UUP).
And it looks like this –- Content protected for Normandy Executive Lounge, Option Trader Elite, Executive Lounge members only]
Many happy returns,