Natural gas futures in New York dropped to a six-week low Monday as forecasts for more moderate temperatures — meaning less demand for the heating fuel — caused traders to sell. But a technical look at the beaten-down commodity suggests a tradable bounce could be at hand.
Before going into the charts, though, please be aware that my take here is purely based on technical analysis, and not an analysis of “fundamentals” that could affect the price structure of natural gas.
The U.S. Natural Gas Fund (NYSE:UNG) has become a popular vehicle to trade natural gas. But you shouldn’t use this exchange-traded fund (ETF) as a longer-term investment. The ETF holds futures contracts, which it has to roll over as the contracts expire — this constant rolling acts as a drag on the ETF price. The UNG is best used for swing trades with time horizons of a few days up to a few weeks.
Here’s an example of how the UNG actually underperforms the price of natural gas: While both the spot price of natural gas and UNG have had serious declines since 2008, natural gas is “only” about 70% lower than where it was at the 2008 highs, compared to the decline in UNG of 95%.
The chart above of the price of natural gas shows the precipitous decline of recent years. However, also of note is the increase in volume over the years, and as such the increased interest in trading natural gas. From a trading perspective this is a positive sign on the margin as more volume means more liquidity.
A closer-up look at natural gas, this time via the UNG, shows its volatile nature. Since its bottom earlier this year in April, natural gas is still higher by around 36%, but has continually traded in up and down swings of 20% to 50%. So natural gas (via UNG, the vehicle of choice) offers good opportunities for swing traders, but it might be tough to stomach for longer-term investors.
With yesterday’s drop in natural gas futures, the UNG gapped down at the open and never looked back. Note also that natural gas is again at the lower end of the uptrending channel that has been in place since April. A gap down at the low of a range, coinciding with oversold oscillators, offers a decent spot for a mean-reversion trade to the upside. Additionally, the UNG is coming down to its 200-day simple moving average, which (excepting for October and November) it hasn’t traded meaningfully above since 2008.
Click to EnlargeA trading bounce here back toward the $21.50 area has a good chance. A drop below the 200-day simple moving average (blue line on chart), however, may mean this ETF is headed toward $17.60, the next meaningful support level — and the August lows.