After a vicious crash in energy over the last year of close to 80%, Crude Oil has made a comeback in the last few months as it doubled from its lows of slightly above 30 to the 70 dollar area. Disconcerting to energy bulls of natural gas, such has not been the case for this commodity. While many site inventory levels that are way too high and a drop in consumption, the same could be said of Crude Oil. As most traders and investor's have discovered, fundamental analysis is not a timing model for the commodity markets. Granted that the fundamentals in the long run usually affect prices, the market can be overvalued or undervalued for quite some time before the reality of the fundamentals kick in. That is why many participants will look to the charts for price action to get a "feel" for what potential price appreciation or depreciation may exist. For in the end, price is reality.
With the advent of ETF's and ETN's what was once reserved for FUTURES traders is now available to the mass of investor's. Natural Gas is no exception and the symbol UNG is one of the vehicle's that investors may use for speculation in natural gas prices. So without further adieu, let's probe the charts to see if we can get a read on what the potential is for the Natural Gas market.
When dealing with commodities, seasonal factors are much more prevalent and important when trying to ascertain low and high price points. So the first thing we want to do is to look at the seasonal ebb and flow of the natural gas market to see if the market is behaving in a "normal" fashion.
As we can see by the chart above, natural gas tends to make its lows in late February and near the end of July. We can see that price peaks usually in the April and October time frames. Remember that this is a 17 year average and individual year's can and do vary. For investors or traders wanting to get long natural gas, we are approaching the strongest time period for natural gas, the July to October time frame. Now that we know the optimum timeframes for this commodity, let's go look at a price chart to see what is transpiring in the natural gas market.
As you can see by the chart, natural gas bulls that played UNG have been handed their heads back on a silver platter as the price of UNG has collapsed from the 62 dollars all the way to the 14 dollar area.
So what observations can we make from looking at the UNG chart. The first thing that really stands out is the tremendous amount of VOLUME that has taken place over the last 3 months. Motivated by the run up in crude oil prices, investors have gone to UNG in droves to accumulate its shares at around the 14-17 dollar price area. The volume peak was seen three weeks ago as the demand for the shares of UNG forced the fund's backer to seek approval from the SEC to increase the amount of shares available to the public to supply the demand for the shares. Not only that, but the OBV indicator, which measures the amount of stock bought on the ASK VS BID, shows that a lot of participants bought on the ASK price a few weeks ago. When we think about it, if people are buying on the ask, they are bullish and want to own the stock. You can see that over the course of 2009, the OBV drifted downward until the bottom in price formed. Since then we've seen a huge run up in OBV (On Balance Volume). Anyone interested in studying this indicator a little more can google Joe Granville, its creator, and research it from there. Or you can just Google on Balance Volume.
What is most interesting is how little price was affected by this sudden rush to own UNG. The hard truth is that so far we had ONE BIG up week about 7 weeks ago when price rallied from 13 to the upper 16 area. Since then, UNG has made a slow sideways grind down back to the 13-14 area and here it sits today. So the question now becomes, is UNG ready to rock and roll higher? After all, T Boone Pickens is bullish and we hear that "Green" is going to be good for Natural Gas. While that may be the case, it's clear that it has not affected price so far this year. If anything we have a glut of the stuff with more being found everyday. But don't let that discourage you. If you are looking to buy the lows, then expect the supply to be plenty at the time of low prices.
We've already ascertained that natural gas is usually a buy at the end of July so we know our timeframe is correct and we should be planning our strategy now. But what about UNG itself. How does it track the price of Natural Gas? For that, we can go to its webpage and see what it's all about. You can go there too. The link is: http://www.unitedstatesnaturalgasfund.com/ There you will find a few short paragraphs giving you a brief description of what UNG does. This is what they wrote.
The United States Natural Gas Fund, LP ("UNG") is a new way for investors and hedgers to manage their exposure to energy.
The United States Natural Gas Fund LP (UNG) is an exchange traded security that is designed to track in percentage terms the movements of natural gas prices. UNG issues units that may be purchased and sold on the NYSE Arca.
The investment objective of UNG is for the changes in percentage terms of the units' net asset value to reflect the changes in percentage terms of the price of natural gas delivered at the Henry Hub, Louisiana, as measured by the changes in the price of the futures contract on natural gas traded on the New York Mercantile Exchange that is the near month contract to expire, except when the near month contract is within two weeks of expiration, in which case it will be measured by the futures contract that is the next month contract to expire, less UNG's expenses.
What I read from this is that UNG buys and sells FUTURES contracts to maintain its equilibrium to natural gas prices. Now if they buy futures and we see that prices should be heading higher into October/November it stands to reason that we have a good chance at making some money, Right? Well, not so fast. You see, this commodity is so seasonal in nature (it always gets cold in northern winters) that the price structure has already built in a seasonal premium in its price structure. Right now for instance, spot gas is below 4 bucks. But if you look at the November contracts closing price, it's already at 5.078. Not only that but when UNG rolls over to the next FUTURES month, notice the price is HIGHER. If you think this through, it means that for UNG to stay exactly at the same price, gas is going to have to rise from 3.94 to 5.74 by December. Look at the December contract. Its already 5.74. This means if you hold UNG until December and the price is 5.74 you're not going to have an INCREASE in price in UNG. Do you see the point I am trying to make? Now I'm not saying you can't make money in UNG, but just be aware that there is a Futures Contract implication. Unlike the Gold ETF, GLD, this fund does NOT take delivery nor do they store the commodity. GLD on the other hand buys the physical commodity (supposedly) and stores it. While one can store gold, it's a little harder storing natural gas. Maybe that's what the last sentence means above in blue print. "less UNG's expenses."
NATURAL GAS (NG) | Download data | Analyze Chart | |||||||
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| Market | Open | High | Low | Last | Change | Pct | Time | |
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| NG.N09 | Jul 2009 | 3.840 | 4.000 | 3.790 | 3.949 | +0.105 | +2.78% | set 14:56 |
| NG.Q09 | Aug 2009 | 3.985 | 4.110 | 3.935 | 4.105 | +0.116 | +2.91% | set 14:29 |
| NG.U09 | Sep 2009 | 4.230 | 4.230 | 4.230 | 4.237 | +0.116 | +2.81% | set 14:25 |
| NG.V09 | Oct 2009 | 4.300 | 4.300 | 4.285 | 4.451 | +0.120 | +2.77% | set 09:10 |
| NG.X09 | Nov 2009 | 4.920 | 4.955 | 4.915 | 5.078 | +0.121 | +2.44% | set 14:34 |
| NG.Z09 | Dec 2009 | 5.585 | 5.750 | 5.580 | 5.748 | +0.125 | +2.22% | set 14:25 |
| NG.F10 | Jan 2010 | 5.900 | 5.935 | 5.900 | 6.055 | +0.126 | +2.12% | set 09:31 |
| NG.G10 | Feb 2010 | 5.940 | 5.940 | 5.940 | 6.087 | +0.124 | +2.09% | set 09:02 |
| NG.H10 | Mar 2010 | 5.875 | 5.900 | 5.875 | 6.019 | +0.124 | +2.11% | set 09:32 |
| NG.J10 | Apr 2010 | 5.790 | 5.790 | 5.790 | 5.896 | +0.119 | +2.07% | set 09:32 |
| NG.K10 | May 2010 | 5.810 | 5.840 | 5.810 | 5.938 | +0.116 | +1.99% | set 09:32 |
| NG.M10 | Jun 2010 | 5.940 | 5.940 | 5.940 | 6.033 | +0.116 | ||
If your still convinced you want to play UNG, here's the perspective on the chart. First off, since the waterfall drop from 62 price has been consolidating in the 12 to 17ish range for about 10 weeks. The simplicity of the pattern requires no channels be drawn for analysis. Instead, this chart is best read with the Fibonacci retracement indicator. Notice how all of the Fibonacci lines provided the little support and resistance during the collapse of the price patterns. As we've already found out, it would take a significant rally to get this stock back anywhere to its glory days. However, should a huge rally in natural gas develop, and UNG would trade above the 18.60 area, then one can make a case for a possible rally to the 25 to 35 area. I am not a big advocate of Fibonacci, but it can provide guidance. In this chart, you can see the double bottom that occurred during 2007 right at the 32 area. This gives this area credibility that it would provide a very stiff resistance should this stock rally.
Conclusion: There is the distinct possibility that investing in this stock could be dead money for a while. If your ok with that, consider that the Double Crude Oil ETF (symbol DXO) went from $28.00 to $1.62 during the drop in Crude from 147 to 32 bucks per barrel. Crude has gone from 32 to 70 dollars per barrel. And what has DXO done its gone to about $4.25 per share. Thus if natural gas prices were to double, the potential to rally to 25 to 32 per share in UNG would be the preferred place to take profits. However, there is nothing to say that UNG can't go any lower is there? A break below the 12.50 area would send prices to new lows, and price is already dangerously close to breaking the only support it has on the chart. If you want in long term, then your best approach is to buy 1/3 now, 1/3 at 10 and 1/3 at 7. This would give you an average of ten should UNG collapse with a stock market meltdown and of course the USA too. The worse that can happen is it never goes to 10 or 7 therefore guaranteeing that the position, albeit small is profitable. Timers should wait until the seasonal lows are near in August or buy a break above the $18.60 area. At that price, at least you'd be hoping on a moving train. If your looking for instant gratification, this might not be the play right now.
Alternative?
To be quite honest with you all, when Chris asked me to write a technical chart report on Natural Gas, I choose UNG because it is such a preferred way of playing gas of late. While the age of the ETF has come, the research I did on this stock and the way Futures are priced made me wonder if this puts the stock at a disadvantage.
If traders want to profit n natural gas another option would be to buy the stock of a company that is in the business. For me, it would be a company that has a LOT of the commodity in the ground, and I mean a LOT. It would have strong management, one that would be smart enough to stop development of new wells, downsize the workforce to meet the decrease in price and batten down the hatches until the industry comes back. Is there such a company? Of course, there are great companies in many industries. Regardless, my decision to purchase a stock in the end lies solely on price charts. So for those of you looking to play natural gas, you might want to consider the way I play it. I use Chesapeake Energy as my proxy for natural gas.
I've already explained it's a leader in its field, but I strongly urge you to do you own diligence as my expertise is more in reading the charts.
With that said, lets look at Chesapeake Energy and Natural Gas chart itself side by side.
Here is an unbiased opinion of what the price chart suggests about Natural Gas.
From a technical perspective there is nothing bullish about this chart. Period. The only good news we can discern is that the downtrend seems to have ended and price has gone into a narrow band of consolidation. You can see the "tails" on the bar chart left after the market sold it off each time it has approached the 4.50 area.
Thus far that area has been tested three times and rejected at each. Notice how the moving averages are also all pointing down, with the fast below the medium and the very long moving average. Recently, the fast crossed below the long moving average adding yet another bearish technical to the chart.
The most likely pattern that gas will follow this year is a late season rally to where the moving averages are at the $5.60 and $6.25 area on the chart. That is during a normal season. For when one plays gas, he is also playing the hurricane season. Once in a while, a storm is big enough and on course enough with the gas rigs off the coast of Florida to cause gas prices to spike. Katrina was such a huge factor in that it not only took out the rigs, but it took out refineries along the coast as well.
Should there be huge disruptions this year, and gas did in fact spike, the most likely target would be the MAJOR resistance area at about the $9.00 area. This would be its maximum potential this year barring a major energy event. Notice the final spike rally in natural gas from the $9.00 to the $13.00 area. This was during the final run up in crude oil to the $147 area. Of importance is that the run from $9 to the $14 area all happened in only 30 days. They were the last 30 days of the major bull run of crude oil.
Conclusion: What is the most likely event for natural gas this year? The outlook for gas is to remain in a trading range with the "seasonal" fall rally. Expectations for a normal year would put the maximum upside to the $5.60 to $6.25 area where the blue (short) and green (long) term moving averages converge. Look for a sideways summer and a rally towards five in the fall. In the (small) event of a major hurricane strike look for rallies to the $7.75 (red) moving average or to the $9.25 area where major resistance stands on the 3 year chart. Just don't bet on it. Accept it if it comes your way.
Our final wrap on gas is to take a look at Chesapeake Energy, a major natural gas player.
On the chart below you will see the significant differences in what the moving averages show on CHK vs. natural gas. For instance, look at the (blue) fast moving average. Notice how it provided important support for price all through out 2007 and up until the equities/commodity crash. Relevant to this is the fact that price is only a few dollars below this moving average for CHK. And notice also how the price of CHK has "rested" right on its (green) long moving average, suggesting that a floor has probably been reached in price. This is vastly different from the natural gas price chart. In CHK, we can see that price and moving averages combined show much more potential to revert to a bullish price scenario.
The first thing I want to see is the bottom technical indicator William % R form a bottom at the -80 area for timing purposes. As you can see, the indicator is great for picking bottoms. You can see that I am using a 16 week factor plugged into the indicator. Look at how good it works!!!
Technicians and chartists should try this setting on a weekly chart. It provides great confirmation of trend changes and bottoms. The key is to wait until the INDICATOR goes into the minus 80 area, and then comes back above -72. That is your "timing" signal that the ODDS favor a rally. This indicator will work especially well if you wait for price to hit a major moving average or major support area on your chart. If this indicator gives a buy, and PRICE moves above the BLUE moving average line at or near the same time, it provides high odds of playing out with the outcome being a price rally.
(look at the signals generated by %R (see black arrows)
Conclusion: Wait to time the buy with the %R indicator and the blue moving average to line up or an important support area on your chart. Either alone would be good, but both or all three together would be a pretty good bet of a rally unfolding. Then look for price towards the 35-50 area. Look for natural gas prices to begin a move up to confirm the "timing is right also.
A good time to take profits is to sell ½ on a double in value, and use an 18 week trailing average stop for the remainder. This is a intermediate time frame for trading.
Technicians should not be afraid to "experiment" with their indicators. For instance, look at my RSI oscillator at the top of the chart. I have a setting that pretty much says "ABOVE 45 bullish, BELOW 45 bearish. That one does a great job of keeping me on the trend.
That's it for this week but if you would like to receive my free weekly trading analysis for different commodities please visit my website at: www.TechnicalCommodityTrader.com
May you all Prosper
