U.S. Natural Gas ETF forming a nice base

Stocks snapped their three-day losing streak yesterday, but a flat session in the Nasdaq, combined with lower volume across the board, made for an uneventful session. The major indices opened near the flat line, moved higher in the first hour of trading, then chopped around in a sideways range throughout the rest of the day. Although the S&P 500 gained 0.8% and the Dow Jones Industrial Average advanced 0.7%, the Nasdaq Composite was merely unchanged. The small-cap Russell 2000 and S&P Midcap 400 indices bounced 0.5% and 0.7% respectively. The main stock market indexes settled around the upper third of their intraday ranges.

Total volume in both the NYSE and Nasdaq limped in 17% lighter than the previous day's levels, indicating a lack of participation among hedge funds, mutual funds, and other institutions. Turnover in the Nasdaq fell back below its average level, while trading in the NYSE remained below average for the twenty-fifth consecutive day. Advancing volume in the NYSE exceeded declining volume by less than 2 to 1. The Nasdaq adv/dec volume ratio was marginally negative.

On June 11, we bought the U.S. Natural Gas Fund (UNG), after it broke out above resistance of a one-month downtrend line. Since then, UNG has been forming a base of support, in a tight range, above its 20 and 50-day moving averages. Assuming this base of consolidation holds up, look for UNG to break out above the range in the coming days. If it does, a "higher high" and "higher low" would be formed, causing the intermediate-term trend of UNG to become bullish. If you missed our initial entry into UNG, a secondary buy point could be found on a breakout above the high of the range, around the $16.40 area. Take a look:

Yesterday's bounce in the S&P 500 coincided with the index coming into key support of its 200-day moving average on June 17, which is also the reason we took profits on most of our short exposure that day. While the bounce off the 200-day MA was to be expected, the question on everyone's minds is whether stocks will quickly recover back to their recent highs, or only retrace a portion of their recent losses before heading back down. Other pullbacks within the uptrend of the past few months have been short-lived, so there's not yet a definitive reason to assume this time will be different. However, one thing that's different about the current pullback has been the negative volume patterns associated with the correction (three "distribution days," followed by a very light volume gain). Leading stocks, an important barometer of the market's overall health, have also started to falter. For these reasons, we have been less aggressive with new buy entries on the pullback than we might otherwise be. The bounce off the 200-day MA is illustrated on the daily chart of the S&P 500 below:

Today is "quadruple witching" options expiration, a day in which contracts for stock index futures, stock index options, stock options and single stock futures (SSF) simultaneously expire. Though we don't trade options, it's nonetheless important to be aware of "quadruple witching" because it tends to have a significant impact on intraday price action of stocks and ETFs. Specifically, "quadruple witching" days are usually marked by erratic, choppy price action in stocks with a large open interest in options, which is caused by market-moving institutions jockeying stocks towards their desired strike prices. For us, this simply means we usually avoid entering new ETF positions until at least the following day.