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Natural Gas is often referred to by traders as the “Widow Maker” because of its hyper-volatility compared to other assets. Perhaps no time has been a better exhibit of the commodity’s wild swings than the past two years. The United States Natural Gas Fund ETF (UNG - Free Report) went from a low of $8.22 in the first quarter of 2021 to a high of $34.50 in August 2022.
Image Source: Zacks Investment Research
What caused the run in Natural Gas prices and the subsequent round-trip?
· The War in Ukraine: Russia and Ukraine are some of the largest energy producers in the world. As Russian troops began to build up on the Ukrainian border in March of 2021, traders began to pile into Natural Gas. Since then, many suppliers outside of Russia and Ukraine have upped production.
· Inflationary Environment:2022 was marked by inflation across most commodities as the U.S. Dollar rallied for most of the year. The U.S. Dollar has pulled back drastically from its 2020 highs.
· Weather Expectations: Many investors anticipated a frigid winter in Europe which never came to fruition.
Despite the Natural Gas living up to its nickname in recent months, there are some signs that the beaten-down commodity is potentially set for a multi-week rally, including:
1. Price is Moving into Long-Term Support: For most of 2020, UNG traded within a range of $8-$11. Price is now retesting this major support zone.
Image Source: Zacks Investment Research
2. Extreme Oversold Levels: The Relative Strength Index (RSI) is a technical indicator that is used to analyze how overbought or oversold an instrument is. UNG’s RSI is at it’s second most oversold level in a year. The last time it was this oversold, UNG had a multi-week rally.
Image Source: Zacks Investment Research
3. Hyper-extended: UNG is down six weeks in a row and more than 66% over the past two months. Since UNG is coming into a support zone, this would be a logical area for it to bounce.
4. Blowoff Volume: Last week, UNG saw its 3rd highest daily volume ever. Massive volume days tend to mark a potential trend reversal rather than a trend continuation.
Image Source: Zacks Investment Research
5. Individual Stock Strength: Individual Natural Gas stocks such as EQT Corp (EQT - Free Report) , Cheniere Energy (LNG - Free Report) , and Vital Energy (VTLE - Free Report) are beginning to decouple from the underlying commodity and show relative strength – suggesting a short-term bottom may be around the corner.
Image Source: Zacks Investment Research
Takeaway:
Natural Gas is showing signs of entering a potentially attractive risk/reward zone. As is always the case with this industry, investors should be aware of the risk and volatility inherent in trading Natural Gas and Natural Gas-related stocks.
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5 Reasons Natural Gas May Be Ready to Bounce
The Widow Maker
Natural Gas is often referred to by traders as the “Widow Maker” because of its hyper-volatility compared to other assets. Perhaps no time has been a better exhibit of the commodity’s wild swings than the past two years. The United States Natural Gas Fund ETF (UNG - Free Report) went from a low of $8.22 in the first quarter of 2021 to a high of $34.50 in August 2022.
Image Source: Zacks Investment Research
What caused the run in Natural Gas prices and the subsequent round-trip?
· The War in Ukraine: Russia and Ukraine are some of the largest energy producers in the world. As Russian troops began to build up on the Ukrainian border in March of 2021, traders began to pile into Natural Gas. Since then, many suppliers outside of Russia and Ukraine have upped production.
· Inflationary Environment:2022 was marked by inflation across most commodities as the U.S. Dollar rallied for most of the year. The U.S. Dollar has pulled back drastically from its 2020 highs.
· Weather Expectations: Many investors anticipated a frigid winter in Europe which never came to fruition.
Despite the Natural Gas living up to its nickname in recent months, there are some signs that the beaten-down commodity is potentially set for a multi-week rally, including:
1. Price is Moving into Long-Term Support: For most of 2020, UNG traded within a range of $8-$11. Price is now retesting this major support zone.
Image Source: Zacks Investment Research
2. Extreme Oversold Levels: The Relative Strength Index (RSI) is a technical indicator that is used to analyze how overbought or oversold an instrument is. UNG’s RSI is at it’s second most oversold level in a year. The last time it was this oversold, UNG had a multi-week rally.
Image Source: Zacks Investment Research
3. Hyper-extended: UNG is down six weeks in a row and more than 66% over the past two months. Since UNG is coming into a support zone, this would be a logical area for it to bounce.
4. Blowoff Volume: Last week, UNG saw its 3rd highest daily volume ever. Massive volume days tend to mark a potential trend reversal rather than a trend continuation.
Image Source: Zacks Investment Research
5. Individual Stock Strength: Individual Natural Gas stocks such as EQT Corp (EQT - Free Report) , Cheniere Energy (LNG - Free Report) , and Vital Energy (VTLE - Free Report) are beginning to decouple from the underlying commodity and show relative strength – suggesting a short-term bottom may be around the corner.
Image Source: Zacks Investment Research
Takeaway:
Natural Gas is showing signs of entering a potentially attractive risk/reward zone. As is always the case with this industry, investors should be aware of the risk and volatility inherent in trading Natural Gas and Natural Gas-related stocks.