Natural Gas ETFs Break Out From Falling Wedge

Despite U.S. natural gas stockpiles sitting below their five-year average, the commodity's price remained depressed over the winter months due to increased production and inter-regional flows that resulted in smaller-than-normal withdrawals from storage to supply the season's heating demand. Analysts expect storage builds to remain large until the end of May and don't anticipate a supply reduction until the onset of summer heat.

"We don't see this occurring for at least several more weeks, forcing the markets to patiently wait out very large guilds, and where our data suggests the next four out of five are likely to print over 100 billion cubic feet of natural gas (Bcf)," NatGasWeather said, per fxexpire.com.

Although the market looks well supplied in the intermediate term, natural gas futures rose in Wednesday's trading session, as the short-term outlook for hotter-than-normal weather conditions in the southern part of the country combined with a forecast for cooler temperatures in northern regions to give buyers an excuse to return from the sidelines in hopes of the double whammy increasing power burn.

Moreover, a breakout above a falling wedge pattern in several natural gas exchange-traded funds (ETFs) suggests that institutional money has already factored recent storage build projections into the commodity's price. Those who want to make a play on rising natural gas prices should take a closer look at these three swing trading ideas.

VelocityShares 3x Long Natural Gas ETN (UGAZ)

With assets under management (AUM) of $340.23 million, the VelocityShares 3x Long Natural Gas ETN (UGAZ) seeks to return three times the daily performance of the S&P GSCI Natural Gas Index. The benchmark tracks front-month natural gas futures. With an average spread of 0.08% and over three million shares changing hands daily, the fund allows traders to position for a short-term bullish move in natural gas prices. Because the ETF rebalances daily, holding periods greater than one day may significantly differ from the headline three-times exposure due to the effect of compounding. As of May 2, 2019, UGAZ trades down nearly 40% year to date (YTD). The fund isn't cheap to hold long term with its 1.65% management fee.

UGAZ shares have formed a falling wedge throughout the first four months of 2019, with most of the sell volume occurring in January and February. The breakout above the pattern's upper resistance line in Wednesday's trading session provides a bullish bias and represents an excellent risk/reward trading opportunity. Those who go long should consider placing a take-profit order near $65, where the ETF's price may consolidate around the January swing high and 200-day simple moving average (SMA). Protect trading capital by setting a stop under April's low at $21.92.

ProShares Ultra Bloomberg Natural Gas (BOIL)

Launched in 2011, the ProShares Ultra Bloomberg Natural Gas (BOIL) aims to offer two times the daily returns of the Bloomberg Natural Gas Subindex. The fund seeks to achieve its investment objective by investing in natural gas futures contracts and may also sometimes use swaps, depending on market conditions. Spreads can be a little wide at times, but the ETF's average daily dollar volume of $1.55 million makes it easy for traders to enter and exit positions. While the fund has a lower expense ratio compared to UGAZ, its 1.31% fee still sits above the 0.98% category average. The fund has net assets of $20.9 million and is 29.47% in the red performance wise this year as of May 2, 2019.

Natural gas bears have had total control of the BOIL share price since late November, apart from a short-lived relief rally in the first half of January. Yesterday's break above the falling wedge indicates that buyers may want to move the invisible commodity's price higher over the days and weeks ahead. Traders who buy the breakout should look for a test of the 200-day SMA. Manage risk by positioning a stop-loss order just below the pattern's lower support line and moving it to the breakeven point if price crosses above the 50-day SMA.

United States Natural Gas Fund, LP (UNG)

The United States Natural Gas Fund, LP (UNG) holds near-month natural gas futures contracts and/or swaps to reflect the daily percentage change of the price of natural gas delivered at the Henry Hub in Louisiana. The fund's 0.04% average spread and deep liquidity keep trading costs down. While the ETF's 1.30% management fee isn't exactly low, it remains reasonable for gaining access to the natural gas futures market. As of May 2, 2019, UNG has a YTD return of -9.63%.

Like the other two natural gas ETFs, UNG sports a falling wedge on its chart. The price has continued higher since printing a bullish engulfing candlestick pattern on April 25 and sits just above the pattern’s upper resistance trendline. The fund has plenty of room to make a run higher and trigger a short squeeze with the relative strength index (RSI) giving a reading below 50.0. Traders who enter here could scale out of half the position at the 200-day SMA and exit the remaining half in the vicinity of January's swing high at $30.33.