The H Report

Recently the Natural Gas markets have been extremely volatile. Within the past 3 months we have witnessed more than a 25% swing ranging from the highs to the lows. During the past few weeks natural gas prices have been consolidating around the $3.75-$4.00 range. This consolidation phase prompted a bullish signal with the winter ahead of us. After reviewing some trends, I believe that natural gas prices are poised for a move higher in the short and long term time frames.

Fundamental Analysis:

After browsing various meteorological sources, I found a video of Accuweather's Chief Meteorologist and Expert Long Range Forecaster, Joe Bastardi, whom has released an early prediction for the 2009-2010 winter. He is predicting a very cold winter for the upper NE between Washington D.C. and New York City. This winter could possibly bring the coldest and most severe conditions the region has witnessed in the past 5 years.




This forecast seems to follow the general trend of predictions from most of the local meteorologist within the region. If the forecasts are proven to be correct natural gas prices could increase by more than 25%.

Technical Analysis:

Within the hottest part of the summer approaching and the winter months ahead of us, natural gas prices are poised to increase. After analyzing the 10 day chart of UNG, I have noticed that there was a sign of bullish divergence forming between UNG and the Relative Strength Index (RSI) technical indicator.

For those not familiar with technical indicators, the RSI compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset. After analyzing the indicator in conjunction with the security, I noticed a discrepancy in the trends. As UNG makes multiple weekly lows, the value of the RSI makes higher weekly lows. This is an excellent example of bullish divergence. Bullish divergence occurs when the security prices falls to a new low, but the oscillator makes a higher low and fails to make a new low. When an oscillator displays the following pattern described above it means that there is more buying pressure than selling pressure at the given price.

If the short divergence above proves to be valid, UNG prices could appreciate as high as $14 within the next week.

The following chart is a 3-month chart of UNG:

As highlighted in the chart above, we are prices currently reside on strong support levels. Not only are current prices at a key trendline support level and at the 200 day Moving Average support, we are currently positioned at the 23.6% Fibonacci Retracement level.

For traders not familiar with the Fibonacci retracement tool, the retracement tool is used in technical analysis to reflect the probability of a security to retrace to that of the original amount. The Fibonacci levels are created by drawing a trendline between the highest and lowest points of the security (in that time frame) and then dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%.

These key support levels mentioned act as technical barriers that need to be overtaken before UNG can expect a positive price movement. If UNG were to move upward, using the 200 Day MA as firm support, UNG could rally as high as or higher than $15.

Disclosure: At time written, author did not own any securities of UNG, but looking to accumulate option calls in the near future.