Thursday, December 03, 2009

Natural Gas Futures - Update



The other day I turned bullish on Natural Gas (UNG, GAZ) due to the fact that it appeared the futures market was making a higher low. Two days later I realized I made a terrible mistake but by that time the trade already had turned against me. Let me explain.

The charting service I use is stockcharts.com and I honestly do believe they are a wonderful site for stock charts which is why I use them. When it comes to futures charts however, this website is extremely limited.

Above is a daily chart of Natural gas futures (stockcharts.com). As you can see, natural gas appears to have made a higher low. The November low is clearly above the September low which made me become somewhat bullish as I always like to buy the first higher low. The thing to keep in mind is that stockcharts.com uses a continuous contract for their futures charts. The problem with this type of charting is that the chart becomes distorted over time due to the price differential between contract months. As an example, lets say the spot contract is trading at 4.20 and the 2nd month out is trading at 4.80. When the first month goes off the board (expires) the next month is then picked up and plotted on the chart. What this means is that the continuation chart will suddenly jump up from 4.20 to 4.80 making it appear as if there was a .60 rally but all that really happened was that one contract was dropped off and the next contract was picked up and plotted on the chart. Over time this can really distort the chart making trends appear quite different from what is really happening.

Below is the January 2010 natural gas futures chart taken from a different website that specializes in futures and as you can see, natural gas did indeed make a lower low in November. Had I looked at this chart I never would have thought we were making a higher low. As a result of viewing this chart I quickly exited my long position at a loss. I can't believe I had such a lapse in judgement given that I have always been well aware of how continuation charts distort trends . Mistakes happen and this is one that I made.

4 comments:

Anonymous said...

Realizing mistakes quickly is a sign of tight aggressive play. Good job.
DaveT

Sean said...

Kevin, thanks for the explanation. Great job!

DG said...

Thanks, Kevin. I also subscribe stockcharts.com and had not been aware of what you just pointed out. Where do you get the correct charts like the one you showed? Please let me (us) know!

David G.

Kevin said...

Hi DG,

You can try Barcharts.com or www.britefutures.com. There are several other good futures sites on the web if you look around.

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