1. Always follow the trend.
2. Never average in (the greatest sucker play / mistake an investor can make)
3. Never take more than a 10% loss
Many had thought that natural gas had finally bottomed at 12 in May and this was the buy, but notice how the 20 EMA stayed well below the 50 EMA, and never even came close to touching. This was another great shorting opportunity.
Now that winter is approaching and it's typically the season for natural gas prices to rise, it is possible that 9.00 was the bottom. But it's pointless to try and predict the future - instead, the best option right now is to stay on the sidelines until the trends suggest otherwise. For UNG to be a buy, the 20 EMA must first cross the 50, and then be able to sustain it. No need to rush or try to catch the bottom (as the past few months have already proven that it was a bad idea) - sometimes the best position is to stay cash. It is better to be late and miss out on a little profit but be right than early and wrong.
The correct play was to short July '08 at around $47 once it broke 200 SMA and and 50/20 ema crossed. Another option was to short at the 20 EMA on 8/27/2008 and cover if it breaks through. This way, you would have rode it all the way down, and would still be short to this day and cover only when 20 crosses above 50 EMA again.
The moving average approach sounds good, but you would miss out on some mighty big moves using it. If you look at GDX in November and December 2008, using the 20 crossing above the 50 approach would have kept you out of a double. I grant you that it keeps you out of a catching knives situation like UNG, but by the time the 20 crosses over 50 you are going to miss a double there too, I'd bet.
ReplyDeleteTo me the 20/50 thing is like Dow Theory--half or more of the move is over before you get confirmation. Its almost like you would be better in UNG, guessing, keeping a tight stop and raising it as it goes up. Like using RS-7 or <10-15 and raising the stop if UNG goes up.
Yes, you are absolutely correct. There is no fool proof method, and especially with volatile movements like GDX, you would've missed a big run from 15. But nevertheless you are exposed to much less risk as a result. Suppose you did buy at 15 (the low), would you have continue to hold on by 11/20?
ReplyDeleteI used BGEIX and caught some of the low under 10--had been buying some before that and after and bought all weakness up to recently when I have been averaging out. This last and strongest run up came completely out of the blue and could not have been anticipated--I tried to look at a pattern of higher lows and BGEIX has shown a pretty consistent pattern taking out the extreme volatility around the low.
ReplyDeleteI was not as fortunate with the UNG buy low approach, because who REALLY knows how low is low? I agree with your rule of keeping stops to prevent a bad scene.
UNG is plagued by many issues other than technical ones. Last time I checked USO was trading at a small discount, while UNG trades at around a 15% premium and the fund will be selling more shares on Sep 28. I don't see how that can benefit an existing holder, but maybe the premium can be eliminated to make this something that actually tracks natural gas. I hate to pay a premium for anything, especially in a depression (oh, I forgot, it is a recovery for Wall Street and Bankstas). Thanks!