Inventory Reports and the Rookie/Beginner Trader …

As mentioned in earlier blog posts, my son Paul is putting in some serious effort in trying to learn more about trading, and I am doing my bit to try and help him.

Paul is trying to learn about trading intra-day currently, and has decided that natural gas is the instrument that he wants to learn with – I think that is fine in a way because he is specifically looking at the 3x leveraged ETFs DGAZ and UGAZ so that he can sim-trade an instrument that has plenty of intra-day volatility that will allow him lots of set-ups to look for/trade.

Paul probably doesn’t realize that natural gas futures have been nicknamed the “widowmaker” for how many people/traders it has brought to financial ruin, but so be it as Paul is only trading sim, and he seems to have a good handle on the basics that I am trying to instill into his psyche.

One of the things I can’t seem to drive into his head is trading around the weekly inventory report. My basic message is that he should know when the report comes out (nat gas is weekly on Thursday at 10:30am eastern) and for him to stay clear of trading/holding positions into and right after the report comes out.

Paul is having a hard time taking that advice in … I think he believes that he can trade the results of the report vs the actual consensus expectations going into the report. I don’t know how to say it more simply … even knowing the natural gas inventory report before hand will not give any trader an “edge” in trading the price action right after the report. That is not just with natural gas, it applies I believe to almost all markets, and to almost all possible market reports. It just doesn’t make sense to worry about the results of any natural gas inventory report … what Paul and all traders should worry about is the price action after any report, and to try and pick set-ups based on the fundamentals you are working on for any and all entry points.

For instance, this week’s natural gas inventory produced a withdrawl of -163 bcf vs an expectations range of a withdrawl of -85 to -166bcf. Nat gas is still well below the average 5-yr storage levels and is in fact near the average minimum of the range seen over the past 5 years. So what should a trader “expect” to occur to price when you get a report that is on the bullish side of expectations, and overall inventory levels remain bullish for nat gas? According to plain logic … Paul and other traders should jump long nat gas futures (or UGAZ for ETF traders) and count your money as it flows into your trading account. Here is the 5-min chart in UGAZ from this past Thursday .

3x-Leveraged Bullish Nat Gas ETF (UGAZ) – 5 Minute Chart – January 24, 2019

First thing to note on trading once the inventory report was released at 10:30am eastern … that 5min candle had a range of $1.29 ($45.80 – $44.51) which is almost triple the normal 14-period average true range in UGAZ right at that point in time. Paul knows enough to not try and trade during any large range/emotional candle, so I don’t know why he has a fixation to want to try and trade nat gas right after the inventory report!!

One of the fundamentals I have tried to impress upon Paul is to compare price to the 20EMA and the 20EMA’s signal line, and to use that basic fundamental as a sign of whether price is in a bullish or bearish slant – and then look to trade in that direction if the chart indicators are in agreement with that read and your other time frames are in sync as well.

Without seeing ahead in what price was going to do, what should have Paul done coming out of the inventory report? The answer again for those who are a little slow is NOTHING!! Paul and all other traders should just be patient and wait for the first real set-up before trying to enter a trade.

Marked as Point #1 on the above chart is the first real sign from price as to whether or not price was bullish or bearish … I would say that based on price alone, the action coming out of the inventory report was bearish – price had made a large ranging candle move lower that broke the 5min ATR support level, and had dropped below its 20EMA and the 20EMA signal line. In addition, the 20EMA had broken below its signal line, and so based on price and its position to those price chart indicators, traders should have been looking for possible bearish trade entries.

As an aside, a bearish trade should not have been your first thought if you had known about the actual results of the natural gas inventory report’s data going into that report’s release. That is just another example of how knowing a report’s (or any economic report for that matter) data beforehand do not provide any trader with a repeatable edge in trading price going into or directly after the release of that report.

Back to the read of price on the above UGAZ chart … despite the bearish look to price action on the 5min chart, Paul understands that traders need to understand what price is doing on the bigger time frames so they don’t get faked out by focusing on too small of a time frame.

3x-Leveraged Bullish Nat Gas ETF (UGAZ) – 15 Minute Chart

I identified the 15min candle where the nat gas inventory report came out this past Thursday … again notice the large range candle surrounding that report’s release. Paul knows better than to enter a trade during these types of candles.

So Paul knows that price will often pullback to consolidate right at the 20EMA and that is exactly what the 15min chart did in this example … so despite the bearish look to the 5min chart coming out of the inventory report, traders/Paul could see that the bigger trend on the 15min chart was actually still bullish and now making a nice two candle consolidation right back at the 20EMA … the candles were smallish in size and were in fact, inside candles (identified with the small white dots above the candles), so Paul should have been pretty confident that price was likely finishing its pullback and he should be actually looking for evidence of a good BULLISH trade entry on the 5min chart instead of the first thought about price being bearish coming out of the inventory report.

3x-Leveraged Bullish Nat Gas ETF (UGAZ) – 5 Minute Chart

I put the 5min chart back up here so we can look again at price to see when the first real bullish setup occurred … identified as Point #2 is where price had actually bounced back above the 20EMA with bullish looking candles (close > open; hammer) and eventually the 20 EMA made its way back above its signal line.

Also note that the chart indicators – the DI+ made its way above the DI- indicator marking a bullish move … the 20EMA Rate of Change changed directions from a downward slope/direction (Bearish) to an upward sloping direction (Bullish).

So the first trade that made sense coming out of the inventory report was in fact a bullish trade … I guess Paul would have been right if he had blindly entered a long trade the second he saw that the report was on the bullish side of expectations – LOL!!!

Obviously I am being sarcastic here … I’m trying to drive into Paul’s head to only enter a trade when he can see hard evidence of price moving in a given direction. To me it that was not the second the inventory report was released with bullish results … it was when price made it back above its 20 EMA on the 5min chart. The actual entry point could be determined using the 1 and 2-min charts.

3x-Leveraged Bullish Nat Gas ETF (UGAZ) – 2 Minute Chart

I identified the first area on the 2min chart where price was clearly signalling a bullish posture/move … two bullish looking candles that broke above the ATR resistance level; price was back above the 20EMA and the 20EMA was in a bullish position relative to its signal line.

3x-Leveraged Bullish Nat Gas ETF (UGAZ) – 1 Minute Chart

The 1 min chart as also in a bullish position and had clearly shown/indicated that the earlier break above the 1min resistance ATR level had been accepted by price. All chart indicators were pointing for price to continue pushing higher. No one knows how far, but the 15min, the 5min and the 2min charts were telling traders that price wanted to go higher here in a high-probability setup.

That was the real lesson from Thursday and the release of the natural gas inventory report … it wasn’t “knowing” before hand what the results of the report would be, it would just be that the report was likely to cause some volatility in the market and traders should be prepared to enter the first set-up that presented itself.

Lots of spots to enter a trade were I’m sure evident before the set-up I noted above, but I’m trying to teach Paul to enter trades that have high probabilities of success. Making consistent money demands that type of mindset.

Cheers … and Paul, get back to studying the charts instead of spending time talking to your girlfriend down in Latin America!!

Leaf_West

A Trader in Training …

My son Paul who is 25, is very keen on better learning how to trade stocks. I have been trying to teach him as best as I can about the right way to go about learning, and all I can say is that I wish I had someone with as much knowledge helping me back in the day.

I’m trying to keep it simple, and teaching him basic principles that he can apply to intra-day charts at first, and then eventually, learn how to transport those fundamentals to the bigger task of swing trading using 195min/daily/weekly/monthly charts.

I won’t go into detail, all that I have try to teach him so far with the blog post, but I think it might make sense to sort of pick up the general ideas behind the biggest points he is trying to learn and put it down in blog post and PDFs so other readers trying to learn trading can also benefit.

So a bit more of a background on Paul – he is 25 as mentioned and has a good job in marketing/sales at the Canadian division of Genreal Mills (GIS). He has done a really good job saving money, and despite my warnings/cautions, he has been aggressively investing the past couple of yearss in both pot stocks and crypto stocks (along with others). Thank God Paul listened to my warnings well at times when I was telling him how/when to take profits. Paul even listened to me when I told him to buy GIS as part of the tax-loss trading I was doing in December … he texted me the other day feeling pretty good about all the money he has made on his corporate stock the last month (lol).

Anyways, some of the best advice I have been trying to impress upon Paul is that he should not try to pick tops and bottoms in stock moves, and that he should only enter a trade once he has “evidence” that price is moving in the direction he wants to trade. That generally has him looking at price in relation to the moving averages and price relative to the support/resistance ATRs.

Paul is trading in a sim account while he practices intra-day trading, and he has keyed into the 3x leveraged nat gas stocks DGAZ and UGAZ as his vehicle of choice the past little while because of all of the intra-day volatility. He’s making sim money and when I get him to explain in writing why he entered a trade where he did, it is obvious that he has listened fairly well to our lessons, and I think he his well on his way to a life long journey/education in successfully trading stocks.

So he told me the past couple of days about a couple of his trades on Thursday/Friday but I won’t bother telling you about what he actually said … bottom line is that he did the right thing on his entries. I will share with you the charts that I just emailed to him with a copy of my summary comments I made about those charts – all of the comments are basically the principles to what I am trying to get Paul to learn.

Here is the DGAZ 5min chart …

DGAZ – 5 Minute Chart

The above chart is from TC2000 and Paul has the same system along with the same chart indicators. The basic ones I have him following are a 20EMA and 8SMA signal line calculated off of that 20EMA. The charts also have ATRs and inside candle markers.

The next panel has DI+ and DI- indicators along with the ADX histogram which is basically the same as my trend strength histogram other than the values shown – mine are using 100 as the extreme level marker instead of the above ADX reading of 55.

The last panel is the 8-period Rate of Change drawn from the 20EMA … pretty much the same as my MA Spread indicator.

Here are the points I shot over to Paul in a quick email …

  • Early on, price could not get back above the opening 5 min candle’s high … eventually, price broke back below the moving avg’s (Point #1) … you could have been suspecting a break lower, and therefore prepared to either short the DGAZ or gone long the UGAZ (see next chart).
  • Point #2 … if you waited for the 5min ATR break before going short, you could have watched the push into the 20EMA and tried a short at that point … the DI- was confirming a downtrend and the ROC of the 20EMA was still pointing lower (the ROC was moving down and to the right).
  • If you didn’t see this chart until Point #3, you still had evidence that price was going lower … you could have tried to short the bounce into the 5min 20EMA.
  • Point #4 … the trend strength histogram was in the extreme strength warning zone so you should have suspected that the move lower was probably done much of what it was going to do … you should have taken any profits and not looked to short any bounce into the 20EMA.  Count your profits and call it a day.
  • In theory you could have played the bounce back up higher, but you never know if it will just chop sideways in such a strong down trending day.  One of the clues that could have led you to go long was the distance that price was from the 20EMA … in essence the rubber band was really stretched and likely going to see a bounce higher that you could try and profit from.

UGAZ – 5 Minute Chart

The opposite to the bear natural gas 3x ETF is the bullish one – UGAZ. The exact same chart should appear here from Friday, with some minor exceptions. Here are the points I made to Paul in an email earlier today.

  • price actually was able to peak below the low of the opening 5min candle … however, it wasn’t ever able to close the 5min candle below the low of the opening candle so you could have been looking for or expecting a bigger move higher at least to start the day.
  • Point #1 … price made it above the 5min moving averages and was consolidating there … more evidence that price wanted to move higher.  Price finally broke above the ATRs and pulled back to the 20 EMA (Point #2) where you could have looked to enter long
  • Point #2 as mentioned was the first pull-back to the 20EMA after breaking the 5min ATR.
  • Point #3 was the next pull-back to the 20EMA and the next good place to enter a long if you wanted to add to your trade or if you did not partake in the earlier entries. You should have utilized the 1min and 2min charts to get your entry better timed for that 5min pullback.
  • Point #4 … extreme warning on the trend strength histogram … take profits and don’t look to buy pullbacks.  Short here at your own risk.  Note the inside candle markers at the top right after a doji candle – signs of balance in buying and selling which indicates that buyers are no longer winning the battle anymore.

UGAZ – 2 Minute Chart

UGAZ – 1 Minute Chart

So there you have it … I think I am going to try and document the lessons I am trying to help Paul with going forward as they are also good reminders to me of the fundamentals that all traders should keep in mind as you trade every day. Look for more posts and PDFs going forward.

Cheers … Leaf_West