The bullish trend of natural gas faces regulatory and technical hurdles which have stymied its uptrend for the past few weeks.
We are looking at the natural gas exchange traded fund UNG to track, analyze and trade the price action of the commodity. On May 10, 2012, we had published an article on Seeking Alpha stating that the steady multi-year decline in the price of natural gas seemed to have stopped and reversed given the change in fundamentals. Click here to read that article.
The article was published when the price of UNG was at $17.50 and now the ETF is trading at the $22 level. We still believe that uptrend on UNG is intact and that the technical hurdle will be cleared if regulatory hurdles don't stop and reverse the current uptrend. Charts show that the next bull target is $30.
The strongest demand for natural gas will come from exports, which has been stymied by the lack of infrastructure. To export natural gas, the product has to be liquefied for transport in tanker ships. In addition special ports have to be built to load the liquefied natural gas on to the ships.
However, now there is a lobbying effort to prevent the export of natural gas. The Wall Street Journal in an article "Export U.S. Gas, Yes or No?" published on November 15, 2012 has stated that Dow Chemicals is against the export of natural gas. There are several other big corporations who use natural gas as an energy source that are against the commodity's export. The opposition comes in an effort by users to keep price low to fatten profit margins. The rationale put forward by the users is that cheap natural gas will spark a manufacturing renaissance in the US and that export will push up the price of the key input product.
So as the Department of Energy considers requests to build export infrastructure for natural gas and the lobby of users voice their opposition the future of exports is in doubt. The uncertainty is reflected in the price of UNG which has not been able to break out of the $23 level for several weeks. A ban on exports will surely push the price of the commodity down.
However, the technicals of UNG look bullish. A look at the chart in our previous article on UNG will show that first technical hurdle between $18 and $19 was cleared and now price is stuck near the $23 resistance level. Resistance levels are areas where the supply of stock exceeds demand leading to a fall in price. Let us take a look at the latest chart of UNG to analyze the price action.
Unlike the chart in the previous article which had a daily timeframe, we are looking at a weekly chart now. Hence the two resistance zones shown in the previous chart is now shown as one.
We feel that UNG is firmly bullish based on the theory of the Four Stages of Market. The market usually moves in four stages of consolidation, rally, consolidation and sell off. To identify a rally stage, the price has to be trading above the 30-week moving average on a weekly chart and the moving average has to be sloping upwards. This is the case with UNG. The 30-week moving average is shown by the blue line, which is now sloping up and the price of UNG is above the average. Also notice that average has stopped prices from falling below and acted as support for a few weeks now.
Technically speaking the resistance zone shown by the red horizontal lines is likely to broken as price has hit the level a few times and failed to make a lower low, which shows that buyers are in control. A lower low is made when the latest low in price is lower than the previous low. If the resistance level is broken UNG could rally up to the next resistance level of $30.
There are three ways to trade UNG. We'd wait for prices to come down to 30-week moving average before buying. The second option is to buy when prices are between $20.25 and $21. Finally, breakout investors can buy once the resistance level is cleared and the stock closes above $24.
If investors are interested in natural gas companies instead of the commodity itself they can look at Revere Natural Gas Index Fund (FCG). One can also look at individual companies such as Cabot Oil & Gas (COG), EOG Resources (EOG) , Devon Energy (DVN), Anadarko Petroleum (APC), Apache (APA) and Chesapeake Energy (CHK)