Natural Gas – A Trader’s Delight

Yesterday, natural gas futures dropped to a six-week low in New York as forecasts for more moderate temperatures (less demand for the heating fuel) caused traders to sell.  As such I thought it would be worth taking a look at natural gas from a technical perspective to see whether any trading opportunities can be found.

Before going into the charts, 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 United States Natural Gas Fund (UNG) has become a popular vehicle via which to trade natural gas.  This exchange traded fund (etf) should however not be held as a longer-term investment as the futures which it holds continually hurts the price of the etf due to the rolling down the curve of these futures contracts.  The UNG is best just used for swing trades with time-horizons of a few days up to a few weeks.

Here’s an example of how the United States Natural Gas Fund (UNG) actually under-performs the price of natural gas; While both the actual price of natural gas as well as the United States Natural Gas Fund (UNG) have had serious declines since 2008, natural gas currently trades roughly 70% lower than where it did at the 2008 highs, yet the UNG trades about 95% lower than the 2008 highs.

The below chart of the price of natural gas shows its precipitous decline over 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 United States Natural Gas Fund (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% – 50% as can be seen on the chart below.  Because of this natural gas, using the UNG as the vehicle of choice, offers good opportunities for swing traders but for longer-term investors may be difficult to stomach.

With yesterday’s drop in natural gas futures, the United States Natural Gas Fund (UNG) gapped down at the open of its trading session and never looked back.  Note also that natural gas is again at the lower end of the up-trending 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 up-side.  Additionally, the UNG is coming down to its 200 day simple moving average, which except for October and November  it hasn’t traded meaningfully above since 2008.  A 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, which is the next meaningful support level and the August lows.

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