Tonight I want to delve into something most people think is obvious but really isn’t that obvious to most market participants. A mistake less experienced traders make is that they are not fully aware of the fact that there are indeed 3 types of trends. They usually don’t grasp the concept of sideways trends to its full extent. Markets can spend a long time trading sideways and if you only think in terms of prices going up or down this can be very costly.
The point of this posting is a very simple one. Then again it is something most people have trouble with. What I am talking about is the concept of trend changes. I see UNG -United States Natural Gas Fund and Natural Gas in general garnering a lot of interest. People easily identify the downtrend and sense that prices somehow are not going lower anymore. Most wrongly assume though that a change in trend automatically means prices are going to rocket higher. Nothing could be further from the truth. I believe the bottom pickers’ approach is flawed because they don’t understand the nature of trend changes. In the case of UNG, which currently is in a downtrend, two things can happen if a trend change occurs. A change into a sideways trend or a change into an uptrend. A change to a sideways trend can take a huge amount of time until a meaningful and tradable uptrend evolves.
Often it takes much longer for trends to reverse direction. That said odds are high we will end up in some kind of bottoming process for Natural Gas. That would be a change to a sideways trend, a possibility most traders don’t gauge appropriately. I’ve been there and done that. That’s why I decided to point this out in tonight’s posting.
I’ve annotated the UNG chart on my public and have suggested early on to just stand aside and wait. Jumping in and hoping for prices to move up significantly would have cost a lot of mental capital. I still think it is too early to go long UNG. So I will continue to stand aside and be patient instead of literally churning mental capital (Dennis Gartman Trading Rule Number 3). What a trend change implies and understanding the nature of trends is key to understanding why I didn’t bottom fish UNG.
Be Patient. Let the trade come to you.
Have a great evening!
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