The Natural Gas Market: 3 Reasons Why This Sector Is Set To Rise
Monday, May 11, 2009
by Jim Stanton, Technical & Quantitative Analyst, Smart Profits Report
In my last “Sector Watch” column on April 27, I posted a spread chart of the daily Nasdaq 100 and S&P 500 chart (this is the Nasdaq 100 minus the S&P 500).
At the time, the chart was approaching its 62% Fibonacci retracement level from the August 2008 highs to the November lows and I issued some resistance targets on indexes that hadn’t reached their minimum upside targets.
Last week, all those minimum targets were reached, in addition to the resistance levels on the PowerShares QQQ Trust (Nasdaq: QQQQ), the ETF that tracks the performance of the Nasdaq 100 (Nasdaq: ^NDX). The Nasdaq 100/S&P 500 spread chart also reached the 62% retracement area.
Here’s what this means…
The Selloff Trigger: 1,377 Points On The Nasdaq 100
The fact that the above scenarios fell into place actually increases the chances of a market correction in the near future.
Having reached the 62% retracement level, the spread chart broke down a bit and closed out the week below its short-term uptrend line. The low on the Nasdaq 100 last Thursday was 1,377.67 and price acceptance below that area should lead to further selling.
Now for this week’s selected sector…
Commodities On The Move
As my colleague and commodities expert Lee Lowell has mentioned here, several top commodities are on the move, having fed off the March lows for the stock indexes.
Sugar, coffee, and cocoa have all darted higher. And following a 70% drop from high to low (which was actually 15% worse than the stock indexes), crude oil has also rallied around $20 higher over the past couple of months. The Energy Select Sector SPDR (NYSE: XLE), which represents oil and oil service companies is trading at a four-month high.
Part of this commodities resurgence is because of optimism that the worst of the U.S. recession is over, plus stronger demand from China and a weakening U.S. dollar. So let’s take a look at one of the most interesting-looking commodities as we head into summer…
Sector Spotlight: Natural Gas
Want to find a worse performer than crude oil?
Check out the natural gas market. This is a very volatile area, with futures having twice fallen by 70% or more over the past four years. In December 2005, for example, the price hit an all-time high of almost $16 per MMBtu, but less than a year later, it slumped back below $5.
The market then consolidated for the next year or so before rallying back up near $14 in July 2008. When the recession hit, natgas weakened again, with traders selling or shorting it any time it rallied. And just a couple of weeks ago, it was trading for less than $3.20.
At current prices, some of the newly formed natural gas companies have gone by the wayside and new drilling is almost at a standstill. That’s a far cry from the “boom times” when natural gas companies drilled a lot of new wells.
While there is plentiful natural gas supply, the inventory isn’t quite as high as it used to be and the price is very sensitive to economic conditions. So if the worst of the recession is behind us, natural gas futures should go along for the ride…
Three Reasons Why Natgas Could Move Higher
Over the past 10 days, natural gas has rallied over 38%, but if you look at the weekly chart of the United States Natural Gas (NYSE: UNG) ETF below, that’s just a drop in the bucket when compared to its previous moves.
The last time I profiled UNG was back on January 5, but the stock never triggered a buy signal. In fact, it continued to head lower. But that could be about to change for three reasons…
- Over the past 10 months, UNG hasn’t been able to close above its 10-week moving average. But as you can see on the chart above, it was finally able to last week.
- The daily and weekly MACD indicators have turned positive. MACD is a technical tool, used to show price momentum. When it rises, the price is set to do the same.
- The stock is very close to breaking above the 2% regression channel (shown on the chart) that was drawn off the July 2008 high.
So where should we buy natural gas? Well, with the upper regression channel currently hovering around $17.75, a couple of daily closes above that level should be bullish for UNG.
That’s it for this week.
Jim Stanton
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