Seasonal Sector Trades: Eyeing a Possible Natural Gas Bounce
By: Christopher Mistal & Jeffrey A. Hirsch
March 03, 2016
Our long natural gas trade from late February to late April boasts a 72.0% success rate gaining 18 out of the last 25 years. One of the factors for this seasonal price gain is consumption driven by demand for heating homes and businesses in the northern cold weather areas in the United States. In particular, when December and January are colder than normal, we tend to see depletions in inventories through February. This has a tendency to cause price spikes lasting through mid-April and beyond (shaded in yellow in next chart). However, just the opposite of this has happened this winter and natural gas price is trading at an almost unbelievable $1.673 per one million British Thermal Units (Btu). This is its lowest price it has traded going back over 17 years to at least 1999.
[Natural Gas (NG) Daily Bars (Pit Plus Electronic) and Seasonal Pattern]
Our best trade scenario using the July natural gas contract has a holding period of approximately 41 trading days beginning on or about the 16th trading day of February and lasts until about April 23. Ample supply and stagnant demand in recent years has caused this window to move around and/or compress but there have been tradable late-winter or early spring rallies that have been profitable.
[February Long Natural Gas (July) Trade History]
In the short-term, natural gas appears heavily oversold as a relatively mild winter has left inventories well above historical averages for this time of year. If the trend of above average temperatures persists into spring and beyond, electrical demand could rise earlier and sharper than usual which could lead to a spike in natural gas prices. Over the longer-term, the U.S. has begun to export natural gas and analysts expect exports could reach 10% of current output by the end of this decade.
First Trust ISE-Revere Natural Gas (FCG) and United States Natural Gas (UNG) are two popular ETFs that correlate with natural gas. UNG holds natural gas futures and swaps and FCG holds stocks of oil and gas producing companies that are exposed to both crude oil and natural gas prices.
[First Trust ISE-Revere Natural Gas (FCG) Daily Bar Chart]
Similar to the performance of crude oil, shares of FCG have been declining since June of 2014. There has been an occasional rally here and there, nothing sustainable given the price pressures of falling crude and natural gas prices. Recent crude strength has begun to aid FCG. It’s January low held in February and its Stochastic, relative strength and MACD indicators have turned positive confirming the shift in momentum. A break out above $4.22 by FCG would be further evidence that the current bounce is sustainable. FCG could be considered a buy on any close above $4.22 with a buy limit of $4.30. If purchased a stop loss of $4.00 is suggested. For tracking purposes, FCG will be added to the ETF Portfolio when it closes above $4.22 and trades less than $4.30 the following day.
[United States Natural Gas (UNG) Daily Bar Chart]
Unlike FCG, the above chart of UNG is not showing any signs of a bottom yet. UNG’s technical indicators are all negative and are flashing signs of being heavily oversold. Aside from a brief blip at the end of January, MACD has been negative since early January. Stochastic and relative strength indicators are also in the dumps. However, this is the time of the year when natural gas usually finds a tradable bottom. UNG could be considered at the first sign of strength from its MACD, Stochastic or relative strength indicators. For tracking purposes, UNG will be added to the ETF Portfolio using its open price on the day after its MACD indicator turns positive. Our MACD indicator parameters are 8-17-9 and are applied to daily prices.