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.
“If you look at the positioning of large speculators, they are the most net short they’ve been since 2011,” Krinsky said. “If everyone is on one side of the boat leaning bearish, it doesn’t take much to trigger that next move to the upside and we are starting to see that right now.”
A short position is a sale on a borrowed security. The investor needs to eventually return the borrowed stock by purchasing it back from the open market. A short squeeze occurs when investors with heavy short positions are forced to cover, or buy back, their shorts in the event of a sudden share appreciation – short sellers are essentially being squeezed out of their short positions, typically at a loss. Consequently, the additional buying momentum from short sellers covering their options contracts help push prices even higher.
Furthermore, seasonal trends could also help add to bullish sentiment. Over the past 20 years, May was the fourth-best month for natural gas.
“So we’re setting up a historically bullish month with a structurally bullish setup,” Krinsky added.
United States Natural Gas Fund
For more information on the natural gas markets, visit our natural gas category.
Max Chen contributed to this article.