Bullish natural gas traders are having a field day of late, with the VelocityShares 3X Long Natural Gas ETN linked to the S&P GSCI Natural Gas Index Excess Return (NYSEARCA:UGAZ) up more than 20% in the past five trading days, and the exchange-traded note more than doubling in the past month. All told, UGAZ has enjoyed some 115% gains since a bottom in late May.
However, UGAZ is starting to flatten on Wednesday — and with leveraged funds often turning on a dime, it’s worth looking at whether this is just a brief pause, or if this is a bullish sign for UGAZ’s bearish brother, the VelocityShares 3X Inverse Natural Gas ETN linked to the S&P GSCI Natural Gas Index Excess Return (NYSEARCA:DGAZ).
UGAZ Pushers and Pullers
On the fundamental front, the Energy Information Administration (EIA) is reporting a 1% year-over-year drop in production, including slowdowns in “all seven of the shale producing regions.” But there’s a worrisome flip side here — namely, that “sustained increases in prices could lead to increased drilling, well completions, and natural gas production.”
That said, consumption is also ticking higher thanks to an increased need from power generation plants, and rising temperatures are helping to boost demand for natural gas (which is also used for cooling). Meanwhile, injections into storage are slowing, according to the EIA’s latest report.
All told, the fundamentals point more toward the bull case. But the charts say that upside might be limited.
Natural Gas Charts
Looking at a chart of the United States Natural Gas Fund, LP (NYSEARCA:UNG), the ETF’s shares recently have cracked through resistance at the 200-day moving average — a line that UNG hasn’t come close to challenging in more than a year. This comes as the Relative Strength Index (RSI) is starting to look toppy, meaning a potential rejection — if it’s going to come — could happen quickly.
But as far as additional overhead resistance is concerned, the next area for UNG is around $9.25, which is the fund’s January high point. That’s some 9% higher from current prices. So there is a little more room to run if the ETF can stay above its 200-day moving average.
For now, watch for UNG’s finish today. A strong close that sees UNG remain above its 200-day would be a bullish sign that the ETF (and UGAZ) have more headroom in the coming days. Weakness — especially a dip below that 200-day — would be a good sign to get out. Next support for UNG if it breaks through the 200-day would be its 50-day moving average at $7.23, or about 15% lower. (And far worse if you’re in a leveraged fund like UGAZ).
Kyle Woodley is the Managing Editor of InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities. Follow him on Twitter at @KyleWoodley.
