Natural Gas ETFs Form Broad Falling Wedge Pattern

Goldman sees reduced production leading to tight supply

Even before coronavirus-driven selling started to roil lofty global share markets in late February, natural gas prices were making fresh multi-year lows amid a weak macro backdrop. Preexisting demand concerns have only intensified in recent weeks as exports of the commodity continue to fall on the back of declining industrial use as the world shuts down to limit the spread of the deadly COVID-19 outbreak. On top of that, an oversupplied market has played a significant role in keeping prices suppressed.

However, investment bank Goldman Sachs sees a rebound in natural gas prices on the horizon. The bank says that a steep reduction in oil and gas production on the back of slumping energy prices will lead to a much tighter supply in summer 2021. "As we move into 2021, this path of declining oil and gas production, if sustained, will likely result in an exceptionally tight summer 2021, which suggests current forward prices are not sustainable," Goldman analyst Samantha Dart wrote, per Barron's.

From a technical standpoint, each of the three natural gas exchange-traded funds (ETFs) discussed below has formed a bullish chart pattern referred to by technical analysts as a falling wedge – a price formation marked by converging trendlines that indicates a potential upside reversal. Let's examine the metrics of each fund and work through several trading ideas.

United States Natural Gas Fund, LP (UNG)

Launched in 2007, the United States Natural Gas Fund, LP (UNG) provides exposure to the commodity by investing in near-month natural gas futures contracts. Over 4 million shares change hands per day on an average penny spread, making the fund particularly suitable for short-term trading strategies. As of March 25, 2020, the ETF holds $428.9 million in net assets, charges a 1.28% management fee, and has fallen nearly 25% since the start of the year.

As well as forming a broad falling wedge over the past two years, the fund has also oscillated within a descending channel since November 2018. Recent selling has pushed the ETF toward $12, where price finds simultaneous support from both of the patterns' lower trendlines. Traders who dip their toe in at current levels should seek a move to $18 – an area on the chart that encounters overhead resistance from the channel's upper trendline and downward-sloping 200-day simple moving average (SMA). Manage risk by placing a stop-loss order underneath the multi-year low at $12.08.

Chart depicting the share price of the the United States Natural Gas Fund, LP (UNG)

ProShares Ultra Bloomberg Natural Gas (BOIL)

With assets under management (AUM) of $33 million, the ProShares Ultra Bloomberg Natural Gas (BOIL) fund aims to deliver twice the daily return of the Bloomberg Natural Gas Subindex. The fund's 1.31% expense ratio isn't cheap due to its use of derivative products to achieve leveraged returns; however, turnover of nearly 500,000 shares provides ample liquidity for tactical traders. BOIL shares have slipped 43% on the year as of March 25, 2020.

Like UNG, this fund has forged both a falling wedge and descending channel, helping to identify vital areas of support and resistance. Over the past few days, the price has stabilized near the patterns' lower trendlines at $4, which may ignite a short-covering rally as traders close out bets against the commodity. Those who buy here should set a take-profit order at $8, where price may find a wave of selling near the channel's top trendline. Cut losses quickly if the fund closes beneath its recent low at $3.95.

Chart depicting the share price of the ProShares Ultra Bloomberg Natural Gas (BOIL)

VelocityShares 3x Long Natural Gas ETN (UGAZ)

Created in 2012, the VelocityShares 3x Long Natural Gas ETN (UGAZ) seeks to return three times the daily performance of the S&P GSCI Natural Gas Index. A competitive 0.12% spread coupled with a daily volume of almost 4 million shares keep transaction costs in check for intraday round-trip trades. As of March 25, 2020, UGAZ controls $456.06 million in net assets and is trading 60% lower year to date.

The fund's shares have carved out similar patterns to the two charts above, with bulls showing some buying interest near crucial trendline support at $25. Furthermore, a bullish divergence has recently formed between the relative strength index (RSI) and the ETF's price, meaning that, as the fund has continued to make lower lows, the indicator has made comparatively shallower lows. In terms of trade management, traders could set a stop beneath the March 18 low at $22.17 and target a move to resistance at $80.

Chart depicting the share price of the VelocityShares 3x Long Natural Gas ETN (UGAZ)
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