Tuesday, June 2, 2009

UNG Showing Signs of Life

Watching the commodity markets come alive during the reflation trade in the last few weeks one commodity in particular has caught our attention. The UNG is an ETF that tracks the performance of Natural Gas prices. In a ten month span from July 2008 to April 2009 the price of Natural Gas dropped almost 80%. Below is the chart of the UNG through 6/2/2009.

Our research of an investment idea typically involves both fundamental and technical analysis. From a technical standpoint the chart looks very encouraging. There are three attractive features on this chart. The first is that the ETF seems to have formed a double bottom with a supportive higher low. By this I mean that the low of $13 at the end of April was not breached when the price fell again at the end of May closing at $13.70, at which point the price rallied. The second is the rising volume through this bottoming process. Marked by the pink arrow, on up days the volume has been very heavy, indicative of strong interest by major players. The third is the breach of the 50-day moving average of its price. There was a false breakout above this moving average during the April bounce, however the 20-day moving average (not shown) has moved above the 50-day, which has not occurred since the middle of July 2008, which indicates accelerating shorter-term momentum.

Using two widely accepted upside targets we can see a lot of upside potential if the technical data proves to be supportive. The 200-day moving average is currently at $23.25 which is 50% above current prices, and even higher is a 50% Fibonacci retracement at $38 on the ETF. So with strong technical data and nice upside possibilities, it’s time to dig into the fundamentals. Stay tuned…