The Real Problem For Natural Gas [United States Natural Gas Fund, LP, Chesapeake Energy Corporation]

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November 5, 2014 12:50pm NYSE:FCG NYSE:UNG

natural gasDan Hassey: Last winter, the “Polar Vortex” sent a chill through the United States. The deep freeze halted operations at several major oil and natural gas players … and gave oil and natural gas a strong start to the year.

What a difference six months makes!

Just this week, oil traded below $76 on news that the Saudis were cutting prices to the United States. And natural gas is struggling as supplies continue to grow even now that the “build season” has wound down.

So, it’s no surprise that the energy commodities and many related stocks are trading in bear-market territory. And now, some experts say we can’t count on another deep freeze to heat up the energy space.

According to the National Oceanic and Atmospheric Administration (NOAA), a repeat of last year’s extreme winter weather patterns is “extremely unlikely.”

Of course, some others are still saying it will be a cold winter. But you don’t buy natural gas just because of the weather.

You buy it because it’s needed much more than gold in our global economy.

And just like gold, the better the buy price, the better potential upside you can enjoy.

Gold is still pretty beaten up right now. But natural gas is almost at a healthy fighting weight where we can start to consider adding it to our portfolios again.

The Real Problem for Natural Gas

Weather patterns do have a seasonal effect on natural gas prices. But the months-long slump has been caused by a variety of factors, not the least of which are the pipelines that bring — or should be bringing — natural gas to market.

Pipelines, especially from Marcellus Shale in Pennsylvania, are a big reason why natural gas inventories keep building — which in turn weighs on prices.

The good news is natural gas prices are able to recover, technically speaking. You can see this in the natural gas chart below.

Natural gas prices breached support in the $3.90 area, and not too long ago, it looked like prices were going to establish a new lower trading range.

Now, prices have rebounded and are trading above support.

So the question becomes, will the new trading range move lower to support at $3.60 or higher toward resistance at $4?

The answer probably lies with the weather.

If we do have a cold winter, natural gas prices could break out and move to the next resistance — the $4.80 area.

Again, most forecasters are not expecting a “Polar Vortex” like we saw last year. So prices will probably not rally to last year’s high over $6 — not here in the short term, anyway.

Why Natural Gas is Still on Fire

However, long term natural gas should do better as more power plants phase out their coal-fired boilers and replace them with natural gas.

There is also a chance that natural gas producers will be able to liquefy and export their natural gas to Europe, China and Japan, where prices are much higher.

Plus, with Russia being a bully, its customers are looking for more reliable sources of natural gas … and that will probably be the U.S. and Canada.

And that’s already starting to help natural gas prices …

Looking at the chart for the First Trust ISE-Revere Natural Gas ETF (FCG), I’m seeing some early signs that FCG and natural gas equities may have found a bottom.

The choppiness indicator (the blue line toward the bottom of the chart) tells us a trend may be exhausted when it reaches below 30. FCG reached 25 on Oct. 15, suggesting that the bearish trend may be ending.

Another important technical sign that the bottom may have been found is the “one-day reversal” that occurred on Oct. 15. A one-day reversal happens when:

  1. A new low is made,
  2. Prices close at the high (white candlestick) and
  3. Big trading volume that day.

Note the black line at the bottom of the chart, which shows a surge in trading volume.

I’ve been telling you that I’m waiting for prices to bottom and then form a base from which it can bounce higher.

It looks like FCG is now basing with support at the $13.50 area, with resistance at the $15.75 area.

During basing periods like the one we’re in now, it is normal for prices to test the low.

Think about basing like a diving board — a short diving board means a short bounce and a long diving board means a bigger bounce. I would like to see a long diving board from which to see prices spring higher.

If you own natural gas, FCG or other natural-gas-related stocks, it may be a good idea to hold them. But if you’re looking to add to them or initiate a position, it’s a good idea right now to wait for the proper time.

dan-hasseyThis article is brought to you courtesy of Dan Hassey

Uncommon Wisdom Daily is a free daily investment newsletter published by Weiss Research, Inc. This publication does not provide individual, customized investment or trading advice. All information is based upon data whose accuracy is deemed reliable, but not guaranteed. Performance returns cited are derived from our best estimates, but hypothetical as we do not track actual prices of customer purchases and sales. We cannot guarantee the accuracy of third party advertisements or sponsors, and these ads do not necessarily express the viewpoints of Uncommon Wisdom Daily or its editors.

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