United States Natural Gas (UNG)
(8/13/07)

Back in April, the same outfit that had introduced the crude oil ETF in 2006, rolled out a new ETF for natural gas.  The stock (symbol UNG) trades based on the front month futures natural gas contract, but as an ETF, it has the leverage comparable to equities.  Not surprisingly, following its roll out, the stock went on to plunge almost $20, but like the futures contract, traced out what it is well countable as 5-wave decline, and it has started to rally impulsively.  Another thing that caught my interest for a possible bottom was the depth of Large Speculator short interest in NG futures, which had reached deeply pessimistic levels.  

Since reaching bottom on July 24, UNG has already retraced nearly 50% of the decline, although as the wave count in the hourly chart above suggests, the recovery should not be over.  Today's action saw the stock pull back in what is countable as a fourth wave decline within a larger and still unfinished Wave 3 pattern.  If correct, that pattern would project highs at either the 46 or 48 areas to complete Wave 3.  Right now, the main issue for the stock is Fibonacci and sentiment based resistance at the 45 area.  This latter resistance tends to dissipate with the expiration of the current August options contract, where a lot of long interest is now focused.  As long as the stock holds above 41, then it validates our wave count, and we're comfortable with the risk.  As far as the larger pattern is concerned, the July 24 low ended a 7-wave decline in the NG futures contract, so while we expect resistance at 46 and 48, there does remain the potential for a full retracement of the decline back towards the 56 area.

Other than the August contracts (which will expire this week) and the September series, in terms of available options there's the October series and then a big gap to January.  Since I don't think the near-term highs should take as long, you can consider the October 2007 $44 Call (symbol UNGJR), currently selling for $4.50 with the Delta at 0.55.  

©Copyright 2007 Tony Carrion.  All content presented is the exclusive property of Market Harmonics. com, which is owned & operated by T. Carrion & Co., LLC, and may not be duplicated or distributed without the express written consent of the author.