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Natural Gas Hits 2020 Highs, Will the Rally Continue?

NYSE:UNG August 27, 2020 2:09pm

Silver Bullish Sentiment Remains Elevated Despite Correction

It's been nearly two weeks since the 15% daily rout in the silver market (SLV), with the decline sending most silver miners (SIL) down 25% or more from their August highs.

While this sharp correction has helped to relieve overbought conditions in both the miners and silver, it hasn't done anything to fix sentiment, which remains at the highest levels in nearly a decade.

This suggests that there could be more consolidation ahead for the metal before it tries to make another run at the $30.00/oz area and that there's no need to aggressively position in miners here with silver at $27.00/oz. Let's take a closer look below:

A picture containing outdoor, water, person Description automatically generated

(Source: Daily Sentiment Index, Author's Chart)

As the chart above shows, the long-term moving average that measures bullish sentiment in silver (white line) remains at lofty levels and has barely budged despite a 20% correction in the metal. This is generally not a good sign.

The more reliable bottoms show up when market participants throw in the towel and puke up their positions, not when they are frustrated to have gone through a drawdown but remain predominantly bullish. Based on the current reading of 84% in silver, I would argue that there's limited fear in the trade, and the crowded trade has not yet been unwound.

While this doesn't mean that we need to see lower prices below the $23.50/oz low to fix this reading, it does suggest that we'll need to correct through time or price. Therefore, while some investors might be hoping for a new high in silver within the next couple of weeks, I think it's unlikely.

A screenshot of a video game Description automatically generated

(Source: TC2000.com)

If we look at the weekly chart above, we remain nestled against resistance at $27.80/oz, with no strong support until the $21.50/oz level. Therefore, while we have seen a sharp correction from the highs, the reward to risk isn't great at current levels with support much lower.

If the bulls could manage to get through the $27.80/oz on a weekly close, I would be more open-minded that this could be a short-term consolidation and that we could see new highs by as early as October.

However, as long as we are $27.80/oz on a weekly closing basis, a re-test of $23.50/oz low is entirely possible.

A screenshot of a video game Description automatically generated

(Source: TC2000.com)

Zooming in further to a daily chart, we can see that silver remains quite extended above its 200-day moving average (yellow line), and it's rare to see sustained upside when the metal is more than 50% above its moving.

Therefore, this corroborates the view that we're unlikely to see new highs in the next couple of weeks in silver. The good news for the bulls is that trading sideways in a range between $23.50/oz - $30.00/oz would be a bullish development, as we often see a multi-week base built following a major breakout.

Given the 5-year breakout for silver above the $21.50/oz level, I would view any corrections that remain above this breakout area to be noise. However, while we're in the upper end of this range near $27.00/oz, the reward to risk remains balanced at best.

So, what's the best course of action here?

Given that sentiment remains elevated for silver and we continue to remain extended technically, I believe the best move is patience to wait for new setups to develop.

If this truly is a successful breakout for silver, we should see the $23.50/oz level defended on a weekly closing basis, and pullbacks below $24.00/oz should be low-risk buying opportunities.

Therefore, I am in no rush to add new exposure, but if the metal pulls back and sentiment also cools off, this would tell us we're getting closer to preparing for what's likely to be another leg higher in Q4.

In summary, I see this as a buy the dip market, but the low-risk trade is beginning to add exposure below $24.00/oz, not near $27.00/oz, while the bulls remain convinced that new highs are imminent.

Disclosure: I am long PAAS, SILV, GLGDF

Want More Great Investing Ideas? The Best of StockNews 2 Step Process to Sell @ Market Top in September 9 "BUY THE DIP" Growth Stocks for 2020
The iShares Silver Trust (SLV) was trading at $24.69 per share on Tuesday morning, up $0.09 (+0.37%). Year-to-date, SLV has gained 48.02%, versus a 7.61% rise in the benchmark S&P 500 index during the same period. SLV currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #3 of 34 ETFs in the Precious Metals ETFs category.

About the Author: Taylor Dart

taylor-dartTaylor has over a decade of investing experience, with a special focus on the precious metals sector. In addition to working with ETFDailyNews, he is a prominent writer on Seeking Alpha. Learn more about Taylor’s background, along with links to his most recent articles. More...
NYSE:SLV August 25, 2020 11:02am

Natural Gas Rises to Overbought Territory

NYSE:UNG August 25, 2020 9:32am

Crude Oil Crawling Higher

  • An elevator ride lower and then climbing the staircase to the upside- September futures roll to October

  • Inventory and production data remain bullish

  • Balancing the equation to allow for a continuation of the bullish crawl

Over the past weeks, some of the leading industrial commodities have been sending a signal to the crude oil market.

The price of lumber rose to a new all-time high at $830.90 on August 21. Before the most recent rally, wood futures peaked at $659 per 1,000 board feet in May 2018.

Last week, copper futures on COMEX probed above $3 per pound for the first time since June 2018. The demand for wood and copper that lifted the price is a function of some supply disruptions and the US dollar's falling value against other currencies.

The dollar is the pricing mechanism for most commodities, and a weakening greenback often has a bullish impact on raw material prices.

Copper and lumber are industrial commodities, and so is crude oil.

The energy commodity hit a low, along with lumber and copper, in March when the global pandemic caused risk-off conditions in markets across all asset classes.

Since then, the prices of WTI and Brent crude oil futures that trade on the NYMEX and ICE have been crawling higher.

The price action in the base metal and wood markets could be a sign that crude oil is heading for the $50 per barrel level sooner rather than later. The United States Oil Fund (USO) and the United States Brent Oil Fund (BNO) track the prices of the two benchmark petroleum futures markets higher and lower.

An elevator ride lower and then climbing the staircase to the upside- September futures roll to October

The price of nearby NYMEX crude oil traded to a high of $65.65 per barrel in early January. In late April, it was $105.97 lower at the negative $40.32 level.

The wide contango or forward premium caused the September contract to fall to $21.99, and October futures reached a bottom at $23.25. Over the past week, September futures on NYMEX rolled to October.

Source: CQG

The new active month October contract shows that the peak on August 5 was at $43.68 per barrel, and the price was trading at just below that level. After taking an elevator shaft to the downside earlier this year, the price has made higher lows and higher highs.

Price momentum and relative strength indicators were above neutral readings at the end of last week.

The total number of open long and short positions in the NYMEX crude oil market has been stable at the two-million-contract level.

Daily historical volatility at 17.5% declined from a high of almost 155% in March. The daily price ranges have narrowed dramatically over the past months as crude oil has been on a staircase to the upside.

Inventory and production data remain bullish

Last week, the inventory data from the API and EIA remained upbeat with the fourth consecutive week of declines in crude oil inventories.

The API reported a decline of 4.264 million barrels for the week ending on August 14. While gasoline stocks rose by 4.991 million barrels, distillates fell by 964,000 barrels. The EIA said that crude oil inventories fell by 1.60 million barrels with a decline of 3.3 million barrels in gasoline stocks.

Distillate only rose by 200,000 barrels. The inventory data was a sign of demand for the energy commodity. Meanwhile, at 10.7 million barrels per day, US production was 18.3% below the peak output level in March.

When it comes to OPEC, Russia, and other leading world producers, the group tapered its production cut from 9.7 million barrels per day in July to 7.7 mbpd in August.

At the most recent meeting, the group concentrated on compliance with the production quotas and did not change the level for the coming month. OPEC and Russia continued to express concern about demand, saying, "the pace of recovery appeared to be slower than anticipated."

Balancing the equation to allow for a continuation of the bullish crawl

Inventory and production data have balanced the fundamental equation for crude oil with the price above the $40 per barrel level. The fundamental and technical position of the crude oil market continues to support the slow and steady crawl to the upside.

Meanwhile, a falling dollar, interest rates at historic lows, and government and central bank stimulus combine to create a potent bullish cocktail for commodity prices. Copper rose to its highest price in over two years last week.

Lumber reached an all-time peak and traded at over $830 per 1,000 board feet over recent sessions. In May 2018, the price of wood reached a record high at $659. Before that, the record level was at $493.50 in 1993. Gold recently moved to a new all-time peak.

The price of crude oil continues to edge slowly higher. The price action in many other commodities could be telling us that higher oil prices are on the horizon.

Resistance on October futures is at $43.68 and at $54.50 on the continuous contract. Support stands at $39 and $38.72. Risk-reward continues to favor the upside in crude oil. However, any sudden decline in the US stock market could change the current path of least resistance for the energy commodity.

Want More Great Investing Ideas? The Best of StockNews 2 Step Process to Sell @ Market Top in September 9 “BUY THE DIP” Growth Stocks for 2020
The U.S. Oil Fund LP (USO) rose $0.18 (+0.60%) in premarket trading Monday. Year-to-date, USO has declined -70.34%, versus a 7.44% rise in the benchmark S&P 500 index during the same period. USO currently has an ETF Daily News SMART Grade of D (Sell), and is ranked #73 of 111 ETFs in the Commodity ETFs category.

About the Author: Andrew Hecht

andrew-hechtAndy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles. More...
NYSE:USO August 24, 2020 9:47am

Is a Natural Gas Correction On the Horizon?

NYSE:UNG August 20, 2020 12:58pm

Gold: Long-Term Picture Remains Bullish

It's been a tough week and a half for precious metals investors as the yellow metal (GLD) has been beaten to a pulp after a couple of days spent residing above the $2,000/oz level.

This violent pullback of more than 10% has some second-guessing whether the metal has topped out, but history would suggest that this isn't likely the case.

While bullish sentiment remains in nosebleed territory which points to further consolidation as highly likely, there are no warning signs present to suggest this bull market has run its course at this time.

The current picture looks very similar to the 2005-2006 period based on one indicator, and gold saw a tremendous run, nearly doubling in the following three years. Let's take a closer look at the weight of evidence below:

A screenshot of a computer Description automatically generated

(Source: TC2000.com)

Beginning with a chart of the Gold to S&P-500 ratio (SPY), we can see that gold finally broke above its long-term moving average in February and has remained above this key moving average since.

This is a bullish development as it shows that the metal is outperforming the general markets, and we often see much higher investment in mining stocks when this signal is on a bullish ratio.

While the recent pullback has been quite significant for gold and has this ratio trending lower, I would consider any corrections to be noise.

This is because as long as gold remains above this moving average (white line), the bullish signal on the ratio will remain intact.

A screenshot of a computer Description automatically generated

(Source: TC2000.com)

If we take a look at the 2004-2008 period, we saw something very similar to the Gold vs. SPX ratio as the ratio consolidated for over a year after an extended downtrend and then finally broke above the moving average in 2005.

Following this breakout, we saw a 15% rally and then a pullback of 12%, which is quite similar to the 20% rally we've seen since February and pullback of roughly 10% from early August.

However, the main takeaway from this chart is that the first break and hold above this long-term moving average is a very bullish development long-term.

As we can see, this was just the beginning of the bull market, as the Gold vs. S&P-500 would trend higher with corrections along the way for another six years.

Therefore, given that we just saw the Gold vs. S&P-500 ratio break out in February, I would argue we're likely in the first few innings of this gold bull market, and nowhere near a long-term top.

This does not mean that gold can't endure 12-17% pullbacks as bull markets can see nasty shake-outs, but it does suggest that 13% plus corrections are likely to be long-term buying opportunities.

A picture containing screenshot Description automatically generated

(Source: TC2000.com)

If we take a look at the above daily chart for gold, we've fortunately worn off the sentiment sell signal we ran into during early August, where I warned that it not a good time to be adding exposure.

However, while we're no longer on a sentiment sell signal, we're still in nosebleed territory here.

This means that while bounces are possible, I believe it's very unlikely we'll see new highs in gold before October.

If we were to see $2,100/oz before October, this would be a bearish development, as it would push sentiment from a short-term sell signal to a long-term sell signal.

Instead, what investors want to see is gold consolidate between $1,775/oz to $2,075/oz over the next two months, as this would allow the impatient traders to leave the trade and allow sentiment to reset.

There's no guarantee that the market will take the ideal path, but this may be the healthiest thing for the gold market currently.

A close up of a logo Description automatically generated

(Source: Daily Sentiment Index, Author's Chart)

So, what's the best course of action here?

Given that we have bullish sentiment for gold in nosebleed territory but just outside last week's sentiment sell signal, I see no reason to rush into the metal.

While bounces are possible as gold can be quite volatile, I see a 50% chance of gold re-testing its lows at $1,860/oz before this correction has run its course, and I would be very surprised if gold made new highs before October. Based on this, I see no reason to be aggressive here.

Having said that, if the metal were to pullback towards $1,805/oz and sentiment begins to reset, this would set up a low-risk buying opportunity heading into what I believe will be a strong Q4 for the metal.

In summary, while this correction has been nasty, it's unlikely to have long-term consequences as the Gold vs. S&P-500 ratio remains bullish.

However, aggressively buying gold here with sentiment still in nosebleed territory is likely not the best move, so while I am holding several miners and gold, I am not adding to my positions just yet.

Disclosure: I am long GLD, KL, AU

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

Want More Great Investing Ideas? The Best of StockNews 2 Step Process to Sell @ Market Top in September 9 "BUY THE DIP" Growth Stocks for 2020
The SPDR Gold Shares (GLD) was trading at $181.22 per share on Thursday morning, down $1.02 (-0.56%). Year-to-date, GLD has gained 26.82%, versus a 5.66% rise in the benchmark S&P 500 index during the same period. GLD currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 34 ETFs in the Precious Metals ETFs category.
NYSE:GLD August 20, 2020 10:22am

Silver: Bullish Sentiment Remains A Headwind

It’s been a volatile past week and a half for the precious metals market, with silver (SLV) getting hit the hardest, falling over 20% from its early August highs.

While we’ve seen an impressive recovery since the lows near $23.50/oz, we have one issue remaining: sentiment. Even though the sharp correction has managed to relieve the previous overbought condition in silver, we have seen absolutely no improvement in bullish sentiment, with sentiment readings sitting at their highest levels since the 2011 peak.

This is not ideal, as it suggests that we saw minimal fear during the pullback, and we continue to remain on a short-term sell signal based on sentiment. Given the lack of improvement in bullish sentiment, I see no reason to be starting new positions in silver above $28.75/oz.

A screenshot of a video game Description automatically generated

(Source: TC2000.com)

Many bulls are cheering recovery we've seen in silver over the past week, convinced that the selling pressured is completely behind us. However, while this relentless rally in silver off of the $23.50/oz lows is certainly impressive, I am not convinced that the metal is immediately heading back to new highs above $31.00/oz.

Unfortunately, while the correction allowed the metals' moving averages to catch up a little, bullish sentiment hasn't budged, which is alarming when we've seen a more than 20% correction in a week. Generally, we would expect sentiment to shift from extreme optimism to at least neutral after a pullback of this magnitude, but this isn't what we've seen at all.

A picture containing water, person, group Description automatically generated

(Source: Daily Sentiment Index Data, Author’s Chart)

As the chart above shows, the long-term moving average of bullish sentiment for silver is currently sitting at 85%, the 2nd highest reading in the last decade. This suggests that we’ve seen no real fear whatsoever for silver during the recent pullback. In fact, on the day that silver slid more than 10%, we had a reading of 68% bulls or more than two bulls for every one bear.

Based on these elevated sentiment readings, I would argue that this trade remains quite crowded short-term, as the bulls are unwilling to waver even in the face of adverse price action. While this doesn’t mean that we have to head back down to revisit the lows at $23.50/oz, it does mean that the reward to risk here is very poor when it comes to entering new positions above $28.75/oz.

A screenshot of a computer Description automatically generated

(Source: TC2000.com)

If we take a look at the technical picture, we’ve got short-term resistance for silver at $27.80/oz, and this is a pivotal level for the bulls on a weekly close. While the intra-week rally above $27.80 suggests that the correction could be over, the bulls will need to get above $27.80/oz on the Friday close to increase the probabilities of this.

Unfortunately, whether the correction is over or not, we have strong support at $21.50/oz and are nestled right against resistance at $27.80/oz, which means there’s no great setup here for going long.

Based on the fact that sentiment remains on a short-term sell signal here, I would argue that there is a higher probability of this rally running into selling pressure between $28.50/oz to $29.00/oz, and I would not rule a pullback to $24.50/oz before this correction has run its course.

So, what’s the best course of action?

As noted in previous updates, I took some profits on my silver miners (SIL) in early August to re-balance any overweight positions.

While I remain long core positions in silver miners, I do not believe this is the time to be adding any new exposure. I prefer to start new positions when the majority is either hesitant or terrified, and we don’t have either setup here. Instead, we have the majority as bullish as ever, with the most bulls in silver since the 2011 peak.

While this doesn’t mean that silver is building a long-term top here, it does suggest that the $29.50 - $30.00/oz area could be a short-term top, and it’s less likely that we’ll see a V-shaped recovery to new highs.

Therefore, while I am open to adding new silver miners to my portfolio, I believe patience is the best move. As long as the bears can defend $27.80/oz to $28.00/oz on a weekly close, there’s no reason to think this correction is entirely over just yet.

Disclosure: I am long PAAS, GLGDF

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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ETF BASIC NEWS August 18, 2020 10:21am

Crude Oil Steady- The Odds Still Favor the Upside

NYSE:USO August 18, 2020 9:36am

Natural Gas Continues to Climb

  • Seasonality says it is still too early for a significant rally

  • The weekly chart looks more constructive than the daily

  • Another opportunity to buy on a dip could be coming soon- Look for a higher low

After trading down to a low of $1.583 on June 26, natural gas made a higher low at $1.646 on July 20. The constructive trading pattern gave way to a rally that took the price of the nearby September futures to a high of $2.379 per MMBtu on August 14. The price settled at $2.356 at the end of last week, just near the high.

Natural gas can be one of the most volatile commodities that trade on the futures exchange.

Since the NYMEX introduced futures on the energy product, the price has traded from a low of $1.02 to a high of $15.65 per MMBtu. With the 2020/2021 winter season approaches, the price bias tends to be on the upside. The time of the year when inventories decline begins in November, but stockpiles are significantly above last year’s level and the five-year average, which could prevent any significant rally.

In November 2019, the price rose to a high of $2.905 before falling to the lowest price in a quarter of a century in June when natural gas fell to $1.432 per MMBtu on the continuous futures contract.

The United States Natural Gas Fund (UNG) moves higher and lower with the price of NYMEX futures.

Seasonality says it is still too early for a significant rally

The EIA reported a slightly higher than expected injection into storage for the week ending on August 7.

The market projections were for a 40 billion cubic feet build, but the inventories rose by 58 bcf. The price of natural gas drifted slightly lower in the aftermath of the report but remained above the $2 per MMBtu level.

As we are now in the middle of August, there are still more than three months to go before the beginning of the withdrawal season in the natural gas market in the United States.

Inventories are likely to be at the highest level in years. In November 2019, stockpiles peaked at 3.732 trillion cubic feet.

We will only need to see an average increase of a little under 29 bcf to reach last year’s level.

A move to over four trillion cubic feet requires an average build of less than 48 bcf. The level of stockpiles and seasonality in mid-August tells us that it is still early for any upside fireworks in the natural gas futures market on NYMEX.

The weekly chart looks more constructive than the daily

At the $2.35 level at the end of last week, natural gas could be heading for a test of the early May peak.

Source: CQG

The daily chart shows that the latest high at $2.379 on August 14 was below the early May peak at $2.499 on the September futures contract. Price momentum and relative strength indicators were in overbought territory.

Open interest, the total number of open long and short positions in the natural gas futures market at 1.253 million contracts at the end of last week, had been drifting lower since June. The lower level of risk positions is a sign that speculators and hedgers are not rushing into the natural gas market in mid-August.

Instead, they have been closing long and short exposures over the recent weeks. The daily chart looks like the price could run out of upside steam.

Source: CQG

Meanwhile, the longer-term weekly chart looks a bit more favorable for the price prospects of natural gas. The continuous contract has made higher lows since June after hitting the quarter-of-a-century low of $1.432 per MMBtu. Natural gas hit a higher low of $1.558 in July and $1.605 per MMBtu later that same month, which was the most recent weekly low.

Meanwhile, natural gas rose to a high of $2.379 in mid-August, which surpassed the early May high and the first level of technical resistance at $2.162. Higher lows and higher highs on the weekly chart are a constructive sign for the energy commodity. Natural gas traded to its highest price in 2020 last week and since early December 2019.

Another opportunity to buy on a dip could be coming soon- Look for a higher low

It may be too early for natural gas to make a substantial move to the upside. The high level of stockpiles, which are significantly above last year’s level and the five-year average, are a factor that should continue to limit rallies in the energy commodity.

November is still over three months away, so any seasonal buying is not likely to appear in the natural gas market for at least the next month. Finally, the trading pattern over the past years has been bearish, and speculative shorts have had plenty of success selling on rallies and pushing the price lower.

Therefore, we should see another period of price weakness that takes the price below the $2 level. I am looking for another higher low above the $1.605 level on the weekly chart, and over $1.781 on the active month September futures. I will be a scale down buyer below the $2 level on the next dip to get ready for a seasonal rally this fall.

However, the high level of inventories could keep the price below the November 2019 high at $2.905, which stands as the critical level of technical resistance in the natural gas futures market going into the winter of 2020/2021.

Warren Buffett gave the natural gas market a vote of confidence with his purchase of Dominion Energy’s (D) transmission and pipeline assets. The price has moved higher since the announcement of the investment. We are still in the heart of the summer season where stocks are building for the coming peak season. The odds continue to favor another correction, but the recent trend has been higher.

I will continue to approach the market with tight stops. Small losses as the price move higher could give way to a profitable opportunity on the downside if the natural gas market decides to take another elevator ride lower.

ETF BASIC NEWS August 17, 2020 9:54am

Will Natural Gas Continue to Rally?

NYSE:UNG August 13, 2020 12:35pm

Natural Gas Makes Its Move

  • A rally to over $2, as expected

  • Natural gas could run into selling for three reasons

  • Trading the range for the coming weeks

In late March, the price of natural gas fell to a quarter-of-a-century low of $1.519 per MMBtu. After a recovery that took the nearby futures contract to $2.162 in early May, selling returned to the market, and the price dropped to an even lower low at $1.432 per MMBtu by late June. I had been writing that the odds favored another recovery from the new twenty-five-year low as the cure for low prices in commodity markets is low prices.

Since trading to the June lows, natural gas has made an impressive comeback. The falling level of injections into inventory provided fundamental support to the energy commodity. At the same time, the diminishing number of operating rigs means that production is falling.

In July, news that Warren Buffett made a $10 billion investment in the natural gas industry with the purchase of Dominion Energy's (D) transmission and pipeline infrastructure likely made some speculators think twice about shorting the energy commodity at the lowest price in two and one-half decades. Natural gas came storming back last week, and rose above the early May high, reaching a peak of $2.284 per MMBtu on August 6.

The United States Natural Gas Fund (UNG) tracks the price of NYMEX futures. The BOIL and KOLD ETN products provide double leverage for short-term traders looking to participate in the volatile natural gas market without venturing into the futures arena.

A rally to Over $2 as Expected

When natural gas was trading below $1.80 per MMBtu, I had written that I expected a recovery to over the $2 per MMBtu level. The injections into inventory have been at low levels.

According to Baker Hughes, the number of rigs operating was 100 below last year, with 69 in operation as of August 7. Moreover, we are now in the final month of the summer season, and the futures market reflects fall prices. The 2020/2021 withdrawal season will start in November, and natural gas often rallies with the uncertainty of the winter on the horizon.

Source: CQG

The daily chart of September futures shows that natural gas fell to a low of $1.583 on June 26. After a rally that fell short of the $2 level, the price reached a higher low of $1.646 on July 20. Last Monday, September futures rose above the July 7 high and moved through the $2 level as a hot knife goes through butter.

The price moved to a high of $2.284 on August 6. Price momentum and relative strength indicators were in overbought conditions. Daily historical volatility spiked higher to over 91% as the daily trading ranges expanded. Meanwhile, the total number of open long and short positions edged lower to the 1.289 million contract level at the end of last week. Speculative shorts likely exited risk positions during last week's rally.

On August 6, the price reached its latest high. Above last week's peak, the next technical resistance level stands at the early May high of $2.499 per MMBtu on the September futures contract. Natural gas settled at the $2.238 level on Friday, August 7, not far below the peak of the week.

Natural Gas Could Run Into Selling for Three Reasons

While I expected a move to over the $2 level, I cautioned that natural gas is not likely to run away on the upside at the beginning of August. The leading reason I expect another pullback is that the market has conditioned speculative shorts to sell the energy commodity on any rally over the past months. Selling at over $2 has been a profitable approach to the market in 2020.

The second reason for caution is that while stockpile injections have been small, at 3.274 trillion cubic feet, inventories are high for this time of the year. At the end of the injection season in 2019, stocks rose to a high of 3.732 trillion cubic feet, which set the bearish tone for 2020. Reaching that level by November would require an average of a 30.53 bcf injection into storage over the coming fifteen weeks. It is likely that stocks will rise to the four trillion cubic feet level for only the third time since the EIA reported inventories.

Finally, open interest has not increased with the price, which is often a warning sign for a futures market. The slight decline in the metric is a sign of short covering, but not of any substantial new longs coming to the market in early August.

The odds favor another move below the $2 level. Meanwhile, a higher low above the July 20 technical support level at $1.646 would be a constructive sign and a reason for a long position on a price dip with a tight stop below the higher low.

Trading the Range for the Coming Weeks

I expect natural gas to settle into a trading range over the coming weeks. The $1.70 to $2.20 level could become a comfort zone for the energy commodity. The upside action tends to come in October through December each year during the start of the peak season of demand during the winter months. Natural gas for delivery in January 2021 settled at $3.147 per MMBtu on August 7, which was above the November 2019 high at $2.905.

A short position with a tight stop could be the optimal approach to the September natural gas futures contract over the coming week. The odds favor another move to the downside after the most recent upside correction.

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The United States Natural Gas Fund L.P. (UNG) was trading at $12.49 per share on Tuesday morning, up $0.18 (+1.46%). Year-to-date, UNG has declined -25.92%, versus a 5.72% rise in the benchmark S&P 500 index during the same period. UNG currently has an ETF Daily News SMART Grade of D (Sell), and is ranked #72 of 111 ETFs in the Commodity ETFs category.

About the Author: Andrew Hecht

andrew-hechtAndy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles. More...
NYSE:UNG August 11, 2020 10:14am

Silver Bullish Sentiment Hitting Extremes

We had seen yet another strong week for silver (SLV) with the metal up 16% last week, and years of underperformance vs. gold (GLD) are now a thing of the past.

In the past three weeks alone, the gold/silver ratio has dropped from 130 to 1 to 70 to 1, and this massive outperformance has contributed to near-record optimism in silver currently.

As of Monday's close, the 14-week moving average for silver's sentiment was sitting near 83% bulls, which tells us that there are 8.3 bulls for every bear in silver on a trailing-three-month basis.

Even more worrisome, we've seen nine readings above 90% bulls for silver in the past 15 days, and even a single day of 90% bullish sentiment is typically a red flag.

Given the extreme exuberance levels we've seen, I continue to see this as a terrible time to be chasing the metal, as it rarely pays to chase an asset when everyone else is piling. Let's take a closer look below:

A screen shot of a computer Description automatically generated

(Source: TC2000.com)

As we can see from the first chart above, the silver/gold ratio has seen a near parabolic spike over the past month, and one of the most dramatic spikes in the past decade. While this certainly bodes well for silver long-term as it tends to perform better when it's leading gold, it's a red flag short-term.

The other issue is that the silver/gold ratio is now running straight into a multi-year resistance level dating back to 2016, and it's unlikely it's going to head through there with some difficulty.

Therefore, I would argue that at a gold/silver ratio of 65, silver's outperformance is likely getting a little ahead of itself.

A picture containing water Description automatically generated

(Source: Daily Sentiment Index Data, Author's Chart)

If we take a look at silver from a sentiment standpoint, we've been in the danger zone (red box) for over two weeks now, and any time silver has visited this zone, it has rarely ended well.

In fact, in the past three instances, silver corrected by over 15% over the following two months from the time that it entered the danger zone above 79% bulls. Assuming this were to play out similarly, we would expect silver to trade down to $22.60 before the end of September.

There's no reason to believe that the correction has to be this deep, but I would be quite surprised if we didn't head down to at least $24.50/oz by early October. Typically, when there are this many bulls in a trade, we need a significant correction to shake them out, so we're going to need at least a 17% correction from the $29.50/oz highs to begin to cool off sentiment.

A picture containing screenshot, computer Description automatically generated

(Source: TC2000.com)

Unfortunately, the other issue we have with silver is that it has charged higher in a parabolic fashion since June, with zero pauses along the way. This is an issue as parabolic rallies rarely unwind in a gradual fashion; instead, they correct violently as there are no support levels to catch them.

While this doesn't mean that we have to head back to the $22.00/oz level breakout on silver, it is certainly an outside possibility and a worst-case scenario. Therefore, while some investors might be tempted to buy this micro-dip to $28.50/oz, I would argue that it's probably not the best idea.

Ultimately, I would expect some more pain short-term before silver puts in a meaningful low.

So, what's the best course of action?

As noted last week, I had taken quite a bit of profit in my silver miners, and I continue to wait patiently for some fear to enter the market to repurchase my positions. At this time, we don't even have the slightest hint of fear, and we have the most overbought reading in years on silver, so I have zero interest in adding new positions here.

If we could see a pullback to the $25.00/oz level or a drastic shift in sentiment, I would consider adding some more exposure. For now, I believe investors would be wise to be patient and allow the correction to run its course.

Disclosure: I am long GLD

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing. Want More Great Investing Ideas? 9 "BUY THE DIP" Growth Stocks for 2020 How to Trade THIS Stock Bubble? 7 "Safe-Haven" Dividend Stocks for Turbulent Times
The iShares Silver Trust (SLV) fell $1.78 (-6.59%) in premarket trading Tuesday. Year-to-date, SLV has gained 50.30%, versus a 5.73% rise in the benchmark S&P 500 index during the same period. SLV currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #3 of 34 ETFs in the Precious Metals ETFs category.

About the Author: Taylor Dart

taylor-dartTaylor has over a decade of investing experience, with a special focus on the precious metals sector. In addition to working with ETFDailyNews, he is a prominent writer on Seeking Alpha. Learn more about Taylor’s background, along with links to his most recent articles. More...
ASX:ENY August 11, 2020 9:47am

Crude Oil Is Trying to Make A Move

NYSE:USO August 10, 2020 10:08am

Will Natural Gas Continue to Surge?

NYSE:UNG August 6, 2020 12:28pm

Is Gold Overextended?

We've seen an exceptional start to the year for gold (GLD) with the metal up over 35% year-to-date, surpassing most asset classes for year-to-date performance briefly being thrown out with the March bathwater.

This incredible run has seen the metal put in a new all-time high to finish the month of July, a very bullish development from a long-term standpoint.

However, while the stars are aligned for an eventual move towards $2,350/oz for gold as an initial target, we are beginning to see a couple of caution signs along the way, with bullish sentiment now at its highest readings it's seen in only five instances in the past twenty years.

Meanwhile, the daily chart is now beginning to get quite extended as well, printing the first caution bars in over six years for the metal. While this doesn't mean that one should rush out and sell their gold bars, it does suggest that not an ideal time to be buying. Let's take a closer look below:

A screenshot of a computer Description automatically generated

(Source: TC2000.com)

As we can see in the chart above, gold broke out of a multi-year base last month and the follow-through from this breakout has been quite impressive.

Since the push above the previous high at $1,920/oz, the metal has climbed another 7% and has sliced through the psychological $2,000/oz level like butter. This bodes well for the gold market going forward, as the first technical target off of this breakout is $2,350/oz.

It's also a great sign as past resistance levels often become new support levels, and the previous resistance at $1,790/oz could now end up being the new floor for the market. Unfortunately, as noted above, things are beginning to get crowded, and any asset class rarely goes up in a straight line.

A close up of a blackboard Description automatically generated

(Source: Daily Sentiment Index, Author's Chart)

As we can see from the chart above, bullish sentiment for gold has headed into the danger zone above 80% bulls and this has typically been a problem for the metal. Following all of these instances, the metal was down by 7% or more in the following three months from its highs, with most instances seeing corrections of 10% or more.

It's important to note that these pushes into this danger zone are leading indicators, and the metal often continues higher over the short-term. However, any upside that is captured while gold is inside these danger zones is typically retraced, and we've been in this danger zone since $1,970/oz.

Therefore, a pullback of 7% from the initial entry into this zone would target a correction down to $1,830/oz at a bare minimum before October. This time could be different, but this time rarely ends up being different in the market as markets are driven by emotions, and human nature never changes.

A screenshot of a computer Description automatically generated

(Source: TC2000.com)

Meanwhile, from a technical standpoint, the daily chart of gold is now corroborating this view. As we can see above, the 280-day moving average for gold (green line) is quite a bit below price near $1,600/oz and gold has a tough time when it's 20% or more above this moving average. Meanwhile, the price action for gold with abnormal volatility is signaling caution bars as well (red bars), and this often tells us that we're seeing panic buying.

Generally, smart money does not panic buy, they buy in panic, and this tells us that retail is finally entering the trade here. While retail can make money temporarily, they often overstay their welcome and corrections ensue. Therefore, I believe that there's a good chance we might see a correction over the coming weeks, and I certainly would not be chasing the metal here.

So, what's the best course of action?

While I am in no rush to sell my position in gold that was bought below $1,450/oz, I am certainly not adding to my position here, and might look to lighten up if we head above $2,120/oz before fall.

This is because the trade is now beginning to get crowded, the metal is getting short-term overbought, and the miners are the most popular sector in the market, a bad sign short-term.

While the multi-year breakout points to higher prices over the long run, I am less inclined to believe we'll see the $2,350/oz target reached in a straight line, so I am being cautious here.

Based on this, I am holding a large position in Kirkland Lake Gold (KL), the most undervalued million-ounce gold producer, but otherwise am not looking to buy any miners at current levels. I've been bullish and adding to my position in gold and gold miners for several months now, but now that retail has arrived in full force, it's time to be open-minded to a pullback.

The bulls will remain in control and this bull market is nowhere near over, but for those looking to add exposure, a better opportunity will likely present itself over the coming months.

Disclosure: I am long GLD, KL

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

Want More Great Investing Ideas? 9 "BUY THE DIP" Growth Stocks for 2020 How to Trade THIS Stock Bubble? 7 "Safe-Haven" Dividend Stocks for Turbulent Times
The SPDR Gold Shares (GLD) was trading at $193.20 per share on Thursday morning, up $1.85 (+0.97%). Year-to-date, GLD has gained 35.20%, versus a 4.11% rise in the benchmark S&P 500 index during the same period. GLD currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 34 ETFs in the Precious Metals ETFs category.

About the Author: Taylor Dart

taylor-dartTaylor has over a decade of investing experience, with a special focus on the precious metals sector. In addition to working with ETFDailyNews, he is a prominent writer on Seeking Alpha. Learn more about Taylor’s background, along with links to his most recent articles. More...
NYSE:GLD August 6, 2020 12:19pm

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