This article will depict my current view and analysis on Natural Gas and the DGAZ 3x Inverse ETF on the S&P Natural Gas Index.
I have been accumulating shares into a position and now we are seeing some of the downside in Natural Gas an upside in DGAZ that I have been looking for. There is still risk of upside runs as Natural Gas makes the turn, but on the whole, my view is for lower highs and lower lows as Natural Gas and DGAZ return to their norms.
In the 1 year DGAZ chart below, I have overlaid with a comparison to UGAZ the 3x long ETF on Natural Gas. There are a few things I would like to point out that are key to my thesis for investment in DGAZ and how I believe this position will play out.
1) You will notice that DGAZ always touches and crosses back over UGAZ following a wide spread where Natural Gas prices rise, peak and return to the norm. It is a consistent cycle.
2) The flat horizontal lines reflect the target zone where I plan to sell my position (unless something unforeseen alters my thesis and I have to adjust). This target zone is between $14 and $16 per unit. One thing I have noted is that at the point of crossover, these have been slightly lower each time, so I will adjust my sell target to $14 to $15, which is in the middle of the zone.
3) This morning, we hit new lows that were below the prior low from the 1st big rally up in UGAZ - see the highlighted area. To me, this was key support for these high >5 price areas in Natural Gas and tells me we are going lower and without another severe winter storm, we won't see these prices likely again in Natural Gas in this cycle. Dynamics and weather to be watched, or for mis-information from sources that may have an interest in trying to get back to these prices to exit positions.
While writing this, Natural gas is now trading at about 4.76. Based on a view of the recent Natural Gas chart, there is support at 4.7 that if we break below this, then we should have some more free falling opportunity in Natural Gas and upwards movement in DGAZ.
From the chart, we could drop from 4.7 to 4.4 pretty quickly, the next level of support. At one of these support points, I would expect to see the bulls work to mount a rally. I could be wrong, but after all the technical damage done to the bulls, I would not expect more than about a .3 to .4 move and that move to stall and fail, only to take us to new lows from these recent levels. We may even begin to see 3.x levels in Natural Gas if the current milder weather patterns continue and we begin to hear of planned Natural Gas injections to storage to begin to replenish to historical levels.
Disclosure: I am long DGAZ.
Additional disclosure: My long position consists of what I consider core units and trading units. I may trade in and out of the trading units if I sense we will have some bull runs in Natural Gas/UGAZ. I may also buy or sell call or put options on BOIL and KOLD (2x leveraged Natural Gas ETF's) that do offer options, as UGAZ and DGAZ do not have options.