Natural Gas Prices: Has The Flame Been Lit? (XOP, UNG, XOM, CVX, APC, CHK, APA)

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January 24, 2012 4:08pm NYSE:UNG NYSE:XOP

David Gillie: As an equities analyst, I’m expected to know the answer to this question. Quite honestly, I don’t. Here’s why:

We’ve seen this movie before. There is a gap up in price, traders think “it can’t go any lower”… “it’s different this time” and then, BANG, they get burned.

Maybe it is different this time. What happened? What’s different now? Is $5 the ‘magic number’? Is there suddenly a new demand for Natural Gas?

What might be different this time is that the last of the die-hard Natural Gas (NYSEArca:UNG) hopefuls got flushed out on heavy volume selling in January. Basically, this tells us that there simply aren’t any sellers left. Nat Gas futures hit the 2009 lows in this last sell-off which is also a decade long low point. Unsurprisingly, Nat Gas is extremely oversold. Could these extremes signal a support level? Maybe so.

The Commitment of Traders (COT) on institutional investors is still extremely low—traders can pop the price—even have a high volume day or two. However, we’ll need to see commitment from institutional buyers to have some assurance this is a “true bottom”. Even if we do have a “true bottom”, this doesn’t necessarily assure a “to the moon, Alice” rally either.

Nat Gas futures show all the right signs of a bottoming process. Premarket futures on Monday, saw prices skidding along at the lows of $2.25 with an explosive move up at 8AM. A strong follow-through for the trading session saw nearly a 10% gain. Profit-taking on the session was minor into the close. A move like this could very well hit the radar screens of institutional investors and substantiate the move. A return to the $5.00 price in February and June highs of 2011 would be a 100% gain. In 2008, Nat Gas futures were over $13 (crude was $140/bbl). I’m not promising double, triples or 10x’s, but there’s certainly some room for Nat Gas to move.

Here’s the best way I think to catch this potential move, while at the same time, having oil exploration as a safety net.

SPDR S&P Oil & Gas Exploration & Production ETF (NYSEArca:XOP)

XOP is a highly diversified ETF in the Oil and Gas Exploration industry with holdings ranging from small caps to some of the most well-know mega caps such as Exxon (NYSE:XOM) and Chevron (NYSE:CVX). XOP also holds familiar names in Nat Gas production such as Anadarko (NYSE:APC), Chesapeake (NYSE:CHK) and Apache (NYSE:APA). Even within the Oil & Gas Exploration industry, XOP is further diversified with Exploration and production comprising 76.30% of its holdings and sub-indexes of Refining & Marketing, 14.44% and Integrated Oil & Gas at 9%.

If Nat Gas is going to make a move, XOP is going to catch it. This is confirmed by the price action on Monday.

Not only does XOP give us the back up of its holdings in crude exploration and production, we also have several positive technicals on the chart.

In a macro view, we’ve developed an inverted head and shoulders pattern with the August, October and December lows—a bullish pattern. Monday, we broke and held above the 200 day moving average and experienced a wedge pattern breakout, again, both bullish. The trend lines forming the wedge pattern are projecting an intersection in the next few days which often triggers a significant move.

None of our indicators are in an overbought condition and all are in a positive projection. XOP doesn’t see resistance until the upper channel line around $59 currently. This gives a realistic potential of better than a 9% move in the near term.

I see XOP as a prudent means of exposure to a potential reversal in natural gas futures.

Disclosure: I currently have no position in XOP.

Written By David Gillie For The ETF Digest

ETF Digest writes a subscription newsletter focused on technical  analysis of exchange-traded funds.  ETF Digest was founded in 2001 and  was among the very first to see the  need for a publication that  provided individual investors with  information and advice on ETF  investing.  Even if you’re not a fan of  chart analysis, ETF Digest  provides insight and commentary into which  global markets are “working”  and why.

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