In our April 2 post on our trading blog, we explained how to trade a bullish technical chart pattern known as the "cup and handle." To explain the pattern, we used the example of the United States Natural Gas Fund ($UNG), which was forming the "handle" portion of the pattern at that time.

In our initial analysis of $UNG, we said, "While forming (the handle), price action will typically slope lower. In the case of $UNG, even an 'undercut' of the March 25 low and 20-day exponential moving average would be acceptable." Last Thursday (April 4), an "undercut" of the March 25 low and 20-day EMA is exactly what happened. The following day, $UNG jumped 4.5% and broke out above the high of its 3-week range. The move was also confirmed by an impressive volume spike. This is all shown on the daily chart below:



Since this ETF closed only slightly above the highs of its range, it is not too far extended to buy near the current price level. As such, regular subscribers of our nightly ETF and stock picking newsletter should note we have listed this trade setup as a new potential buy entry. Our exact trigger, stop, and target prices for this ETF swing trade can be found in the "watchlist" section of today's report.

One of the things we like about the $UNG trade setup is that it is a commodity ETF. Since our market timing model is now in "sell" mode, we are generally avoiding the long side of the market. However, one exception is ETFs with a low correlation to the direction of the stock market. Commodity, currency, fixed-income, and international ETFs are all such examples. If you are unfamiliar with our rule-based system for timing the market, click here to learn more.

Another trade setup on our watchlist going into today is Oil Service HOLDR ($OIH). Last Friday, this ETF gapped down to "undercut" horizontal price support of its recent consolidation, but rallied sharply higher on an intraday basis and closed within the prior trading range. This is shown on the daily chart pattern of $OIH below:



When we see the type the price action that $OIH has demonstrated, whereby an obvious level of support is undercut and then quickly recovers, it typically leads to a higher price the following day.

An "undercut" of support is bullish because it shakes out the "weak hands" who sell the position on the first break of support, which reduces the amount of overhead supply the stock or ETF must overcome in order to move back up. The chart of $UNG above is a good example of this, as the ETF undercut the lows of its consolidation and its 20-day exponential moving average on May 4, but then gapped sharply higher the following day.

Deron Wagner is the Founder and Head Trader of both Morpheus Capital LP, a U.S. hedge fund, and MorpheusTrading.com, a trader education firm.