Natural Gas ETFs May Heat Up Near Chart Support

Natural gas prices have come under heavy selling pressure over the past week amid growing supplies and worries about looming storage surpluses as demand eases throughout the cooler fall months. Last week's Energy Information Administration (EIA) report revealed that gas inventories rose by 89 billion cubic feet for the week ended Sept. 11, surpassing analysts' expectations of 77 billion cubic feet. Furthermore, total supplies stand 421 billion cubic feet above their five-year average.

However, despite the near-term unfavorable macro backdrop, Henry Hub natural gas futures for October staged an intraday reversal Friday to close above key support at $2, indicating that prices may hold this closely watched psychological level. Traders can gain exposure to natural gas prices through the two exchange-traded funds (ETFs) outlined below. Let's take a closer look at 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 seeks to provide similar returns to front-month natural gas futures contracts traded on the New York Mercantile Exchange. The ETF turns over more than 5 million shares per day on average penny spreads to ensure ample liquidity and keep transaction costs low. UNG controls net assets of $416.2 million, charges a 1.33% annual management fee, and is trading 28% lower year to date. Price performance has improved over the past three months, with the fund gaining 21.4% as of Sept. 21, 2020.

After a two-week pullback, the fund found buyers last week at the $11.30 level – an area on the chart that encounters support from a horizontal line stretching back to mid-May. Those who open a long position here should look for a move back up to last month's swing high at $14.58. Protect capital with a stop-loss order placed beneath the Sept. 17 low at $11.28. The trade offers an excellent risk/reward ratio of almost 1:5 (59 cents risk per share vs. $2.72 profit per share), assuming a fill at Friday's $11.86 closing price.

ProShares Ultra Bloomberg Natural Gas (BOIL)

The ProShares Ultra Bloomberg Natural Gas ETF aims to return twice the daily performance of the Bloomberg Natural Gas Subindex – a benchmark reflecting price changes in publicly traded natural gas futures contracts. However, returns greater than one day may deviate from the ETF's advertised leverage due to compounding. Turnover of nearly 1 million shares per day, coupled with a modest average 0.20% average spread, allows traders to easily enter and exit positions with minimal slippage. As of Sept. 21, 2020, BOIL holds assets under management (AUM) of $50.6 million and has gained nearly 40% in the past three months. Year to date, the fund is down 53.53%.

Natural gas bulls stepped back into the fund at $34, where price finds a confluence of support from a four-month trendline and the 61.8% Fibonacci retracement level measured from the July low to the September high. Active traders who buy the fund at these levels should think about setting a take-profit order somewhere near the top of the Fibonacci grid and downward sloping 200-day simple moving average (SMA) around $49.50. Be prepared to cut losses if the ETF fails to hold above the Aug. 3 breakaway gap low at $33.23.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.