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Natural Gas: What Are the Reasons Behind Recent Downtrend?

Published 09/11/2023, 03:03 AM
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Probably the worst or at least one of the worst performers in the overall market and in the commodities market, natural gas is choppy and lifeless.UNG-Daily Chart

So why write about it?

For starters, we love an underdog. Perhaps a bit too contrarian, the reasons for the decline in natural gas may reverse quickly.

First off, much of the decline and lack of rally power is credited to cooler U.S. forecasts.

Secondly, a decline in US electricity output has weakened prices.

Thirdly the rig counts and EIA reports have been mixed.

On the flip side, Australia's LNG workers are striking.

Enbridge (NYSE:ENB) bid $14 billion for Dominion Utilities as the CEO described the assets the company is acquiring as "must-have" infrastructure for providing safe, reliable, and affordable energy.

We like to consider all the fundamentals as part and parcel of the technicals.

In other words, regardless of where natural gas goes in the next few weeks, the risk/reward looks tempting, provided there is a sound risk point. No stubborn trading.

Compared to oil prices, natural gas looks cheap.

Perhaps for good reasons, nonetheless, let’s examine the charts.

The first chart is of the ETF UNG. The top holding is the US Dollar at 61.14%, which means that the ETF is heavy into cash.

This is similar to what we saw in AdvisorShares Pure US Cannabis ETF (NYSE:MSOS) the Cannabis ETF back on June 21st, when we wrote this article.

On dollar holdings, our research found if an ETF allocates a significant portion of its assets to holdings denominated in US dollars it could be in a defensive position during uncertain market conditions. Cash holdings can act as a buffer against market volatility or as a safe haven asset.

Since MSOS is up over 30% since that article, we wonder if UNG and its dollar holdings can lessen over time.

The UNG chart leads us to make a few assumptions.

  1. There must be a high short float
  2. The price is hanging onto the July 6-month calendar range low (red horizontal line)
  3. Our Real Motion indicator shows a BULLISH divergence with momentum above the 50 daily moving average (blue) and in a bullish phase.
  4. Our Leadership indicator shows UNG underperforming but this past week, the performance gained a bit.
  5. Risk/reward is potentially stellar although with bottom picking, one must be aware of the risks.

The futures chart is of the October 2023 contract. There is a floor of support at $2.00. In September 2020, the last low before the huge explosion higher was at $1.795.

A move over $3.00 looks more enticing.

This is for educational purposes only. Trading futures and ETFs come with risk.

ETF Summary

  • S&P 500 (SPY) 440 support 458 resistance
  • Russell 2000 (IWM) 185 pivotal
  • Dow (DIA) 347 pivotal
  • Nasdaq (QQQ) 363 support and over 375 looks better
  • Regional banks (KRE) Another modern family member struggling here under 44
  • Semiconductors (SMH) 150-161 range to watch
  • Transportation (IYT) Broke the calendar range low along with XRT-not-so-healthy
  • Biotechnology (IBB) Compression between 124-130
  • Retail (XRT) 62.90 the July calendar range low broke down along with IYT-2 negative signs

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