After steadily declining for most of the year, natural gas prices are finally bouncing back, with the commodity-related exchange traded funds testing its short-term resistance.
On Friday, the United States Natural Gas Fund (NYSEArca: UNG) was up 2.3% and the iPath Dow Jones-UBS Natural Gas Total Return Sub-Index ETN (NYSEArca: GAZ) was 3.5% higher after both exchange traded products surged over 5% Thursday. UNG is now trading back above its 50-day simple moving average and GAZ briefly traded above its short-term trend line Friday.
Meanwhile, the VelocityShares 3x Long Natural Gas ETN (NYSEArca: UGAZ), which tries to reflect the three times leveraged or 300% performance of natgas futures, rose 6.6% Friday after a 16.4% gain Thursday. Additionally, the ProShares Ultra Bloomberg Natural Gas (NYSEArca: BOIL), which takes the two times or 200% daily performance of natural gas, rose 4.5% after a 10.3% pop Thursday.
Jonathan Krinsky, market technician at MKM Partners, argues that the natural gas market could continue to rally on seasonal factors and a potential short-squeeze among an overly bearish investment base, projecting a potential natural gas target of $3 per million British thermal units, reports Amanda Diaz for CNBC.
NYMEX natural gas futures were 1.2% higher Friday, trading around $2.78 per Btu.
“While the structural chart is firmly bearish, we think a countertrend rally could be underway,” Krinsky, market technician at MKM Partners, said on CNBC.
Specifically, Krinsky pointed to a so-called momentum divergence in the natural gas charts. The natural gas market has been trading in a downtrend, and a divergence occurs when the price makes lower lows without significant decline in its momentum indicator – looking at the relative strength in a weekly chart of UNG, the relative strength index readings have been relatively flat. When a divergence manifests, there is a high probability of a price retracement, or temporary reversal in the direction of a security’s price that is counter to its prevailing trend.
Krinsky noted that the recent surge in natural gas prices broke above a key resistance at $2.64, which suggests that there is more room to run.
The prevailing pessimistic sentiment on the natural gas commodity could also help fuel a potential short squeeze in the market.