The Case for a Long NatGas Trade

07/17/2012 7:00 am EST

Focus: TRADING

Moby Waller

Editor, Wyatt Research

Moby Waller of BigTrends.com outlines the argument for going long natural gas based on several technical and fundamental facts.

Natural gas has made a relatively quiet big move in recent months, after basically years of underperforming. The reasons behind this move? Well, depending on who you talk to, it ranges wildly:

  • the scorching summer weather in the US
  • taking market share away from coal (a coal executive in Kentucky actually basically said this to me recently)
  • the drop in crude oil prices
  • an increase in US domestic production and usage in different manners
  • Nat Gas prices being still cheap on a relative basis to other forms of energy
  • its growth as an "alternative" energy source for a variety of industries

(In this article, Chesapeake Energy (CHK) and others state their positive long-term views on the fundamental outlook for Natural Gas.)

But we’re not examining the whys of the recent natural gas performance in this piece…we’re more looking at what has actually happened, and what this recent price action is telling us about the future potential. Remember that an upward move on any security indicates buying pressure, and that accumulation is underway, regardless of whether you are a "chart watcher" or not.

Take a look at the following relative performance chart, which tracks the gain/loss of a wide variety of energy-related ETFs since April 2012:

  • United States National Gas Fund (UNG)—green
  • Energy Select Sector SPDR (XLE)—gray
  • MarketVectors Oil Services ETF (OIH)—orange
  • United States Oil Fund (USO)—tracks Crude Oil—blue
  • Guggenheim Solar (TAN)—yellow
  • MarketVectors Coal ETF (KOL)—red

chart
Click to Enlarge

You can see that there has been a clear performance divergence between UNG and these other ETFs, particularly since April 29, when UNG had a bottom. And remember that is comparing natural gas to a wide variety of energy-related sectors, not just oil or oil stocks.

The market tells a tale, as has been said for a long time—and it currently is showing a preference for natural gas and the UNG ETF that hasn’t been present in years. This outperformance is significant, especially when one looks at how poorly natural gas has done over the past several years.

Up Next: Monthly Continuous gas futures...

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The following chart is the Monthly Continuous natural gas futures. Note that the commodity recently hit fairly extreme lows.

One key here is the relatively huge upside potential natural gas has should it even begin to approach the key recent round levels of $4, $5, and $6, where it had been as recently as 2009. A "small" dollar move to those important round levels would be huge in percentage gain terms.

chart
Click to Enlarge

Next, let’s look at the recent move in UNG on the daily chart. While this ETF has had performance problems in the past, including reverse splits…one can see here that a clear consistent downtrend was in place—and that downtrend looks to have made a clear bottom and reversal. The uptrend is making higher highs and higher lows, which is a bullish sign.

Also note the Williams %R indicator at the bottom—it was extremely consistent in giving bearish readings for some time, but now it has twice broken into strongly bullish levels. And even on a short-term retracement basis (or if one did a Fibonacci retracement), there is plenty of potential upside here.

chart
Click to Enlarge

Natural gas and its ETF, UNG, have been a tricky commodity and ETF to trade for some time now, especially for bulls. However, the recent signs of life appear real, both on a short-term basis (where there certainly can be volatility in both directions)—but more importantly there may be a big long-term trend emerging…the kind that can last months or even years.

The pattern of this commodity here reminds me a bit of how years ago gold (GLD) finally emerged from a long dormant period, then went on a long extended bullish run. It’s not quite the same pattern, and the fundamentals are different, but there is a similarity here that I see as a long-time market watcher and participant.

Moby Waller can be found at BigTrends.com. Disclosure: Big Trends’ ETF advisory service clients are in a UNG options spread position.

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