Will This Commodity Buck The Trend?

by Tom Aspray

The plunge in commodity prices has caused a significant exodus from the commodity markets as assets under management have dropped 21% over the past year. The DJ-UBS UBS -0.57% Commodity Index (DJUBS) may face its third consecutive yearly decline.

This has caused many managers of commodity funds like Pimco’s Nic Johnson to say “I think the supercycle is dead.” Citicorp experts in April said that it “expects 2013 to be the year in which the death bells ring for the commodity supercycle.”

Could this be a contrary indicator? It is possible as the recent technical action in crude oil indicates that not all commodities are going down.

Last week’s EIA report reflected a lower than expected rise in natural gas supplies in reaction to the country-wide heat wave. Late Tuesday’s news of a fire on a natural gas rig off the coast of Louisiana will bring additional focus on this market.

More importantly, the technical action does suggest that traders and investors should take another look at this historically depressed market.

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Chart Analysis: The weekly chart of the natural gas futures shows a potential long-term base, line b, that has formed since the early 2012 low.

• The gradual pattern of higher lows; $3.010 in 2012, $3.257 in early 2013, and then $3.526 last month is positive.
• The long-term downtrend, line a, that goes back to 2009 was broken in March.
• Prices have just retested this breakout level, which is a positive sign.
• The weekly on-balance volume (OBV) broke through resistance, line c, in April, which completed the base formation.
• The weekly 20-week EMA is at $3.868 with the weekly starc+ band at $4.215.
• A strong weekly close above the high at $4.534 projects upside targets in the $5.80-$6.00 area.

The daily chart of the natural gas futures shows daily support, line e, in the $3.492 area.

• The 20-day EMA is trying to flatten out with short-term resistance at $3.835, which was last week’s high.
• The 38.2% Fibonacci retracement resistance from the April high at $4.534 is now at $3.909.
• This is just above the quarterly pivot at $3.875.
• The 50% retracement resistance is at $4.031 with the downtrend (line d) at $4.126.
• The daily OBV bottomed in February and has formed a clear uptrend, line g, which suggests accumulation.
• The OBV has resistance at line f, which was tested last week and could break out ahead of prices.
• There is minor support at $3.607 to $3.640 and then at $3.546.

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United States Natural Gas (UNG) is a an ETF with assets of $935 million that seeks to the replicate the performance of natural gas. It has a relatively high expense ratio of 1.08% and an average daily volume of almost five million shares.

• The daily chart shows that UNG made a high of $24.09 on April 18 and then dropped to a low of $18.69 on June 28.
• This was a correction of over 22% in just three months.
• The daily chart shows a potential bottom formation, line b.
• The daily downtrend, line a, is at $20.51 with the 38.2% retracement resistance at $20.74.
• The more important 50-61.8% resistance is at $21.38 to $22.02 with the May high at $23.02
• The relative performance slightly broke its downtrend, line c, last week. A move above the recent high would complete the bottom formation.
• The daily OBV also shows a potential bottoming formation as a move above the July 18 high will also break the long-term downtrend, line d.
• The monthly pivot is at $19.79 with the gap support at $19.74 to $19.56. The spike low at $18.78 likely cleaned out most of the stops.

What it Means: The technical action in both the natural gas and in United States Natural Gas (UNG) suggests that a bottom is being formed. Among commodity traders, the natural gas futures are known as the “widow makers” because of their extreme volatility and high risk.

John Person, a pioneer in seasonal commodity analysis, states in his Commodity Traders Almanac that natural gas “has a strong seasonal tendency to bottom in July and then peak in December.”

The technical and seasonal outlooks appear to be in agreement, though new positions in United States Natural Gas (UNG) still have a high risk.

There are several oil and gas stocks, but the most well-known stock, Chesapeake Energy CHK -0.49% Corp. (CHK), is now testing major resistance. The daily relative performance analysis of the energy sector turned positive last Friday, so this could be an important week.

How to Profit: For United States Natural Gas (UNG), go 50% long at $19.67 and 50% long at $19.56, with a stop at $18.73 (risk of approx. 4.4%).

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