Natural Gas Is Headed for a Breakout (UNG, UGAZ)

Natural gas hasn't done much since mid-March. The United States Natural Gas Fund (UNG) is channeling between $7.03 and $6.28, following a bounce off the March 3 low of $5.78. Whether natural gas goes up or down, the breakout of the range presents a trading opportunity. Leveraged and inverse natural gas ETNs also provide a way to increase returns, and trade a move in either direction (without taking a short position).

If the United States Natural Gas Fund rallies above $7.03 (especially if it closes above $7.03) that signals an upside breakout and likely further price appreciation. The range is $0.75 wide ($7.03 - $6.28) so an approximate upside target is $7.78 ($7.03 + $0.75). The upside breakout could signal a longer-term trend change, though. In late March, UNG broke above a multi-month descending trendline in the $6.90 region, but so far has stayed near that level. Continued strength would confirm the trendline break and point to higher prices, potentially into the $9 region over the next four to six months.

The long-term trend is still down at the moment, though, and a drop below $6.28 would keep that downtrend alive. If UNG falls below $6.28, the initial target is $5.53 ($6.28 - $0.75). As long as the downtrend stays in effect, there is a possibility for even lower prices.

VelocityShares 3x Long Natural Gas ETN (UGAZ) moves three times as much as natural gas, on a daily basis. As a leveraged ETN it is meant for short-term trading, as opposed to longer-term trading, since over the long-run it doesn't accurately track the price movements of natural gas (it only tracks daily movement). But if looking for a natural gas ETN that has more movement, this one does. It bottomed at $16.75 in early March and is now trading in a range between $28.27 and $20.48. The range is $7.79 wide. If the price breaks above $28.27, the target is $36.06. If the price drops below $20.48, the target is $12.69.

VelocityShares 3x Inverse Natural Gas ETN (DGAZ) moves three times as much as natural gas on a daily basis, and also moves in the opposite direction. Therefore, while UNG has moved higher off its March low, DGAZ has fallen from its March high of $32.28. If natural gas and UNG break higher (out of their own ranges), then DGZA will continue to decline. If natural gas and UNG drop below their current range, DGAZ will rally. 

Notice how DGAZ is not currently in a range, though it has continually declined since peaking on $32.28. The chart shows how these leveraged and inverse ETNs can disconnect from the price movements of natural gas if holding positions for longer than a day. If UNG breaks above $7.03, expect DGAZ to decline to about $9.50. If UNG breaks below $6.28, watch for DGAZ to rally to $31.75 (these targets attempt to compensate for the longer-term disconnect with natural gas prices).

The Bottom Line

Natural gas is presenting a trading opportunity, whether it breaks above or below its short-term range. Right now it looks poised to break higher. Leveraged ETNs have bigger intra-day price moves, which may be preferred by some short-term traders. The inverse natural gas ETN is also leveraged. It moves in the opposite direction as natural gas, providing a way for traders to participate in a decline in natural gas prices without taking a short position (because they can buy the inverse ETN, and it will go up in the short-term if natural gas declines). Leveraged and inverse ETNs are complex financial instruments, and often experience extreme volatility and price gaps. Read the ETN's prospectus, before trading, to understand all the risks.