ETFs
“Natural Gas Traders Despearately Seeking Ways to Predict Trends”? We've Got a Match!
US Natural Gas ETF (UNG) just soared to 2-year highs. See how Elliott wave analysis makes the heart grow fonder
by Nico Isaac
Updated: April 22, 2022
Many years ago I asked my grandfather how he knew my grandmother was "the one."
He sat back for a second, took a deep breath, and smiled, remembering:
"I had never 'fallen' in love before. But I had followed my way into it several times."
By that, he meant he knew, long before courting a woman, that she was already fond of him. There were, he said, "bubbles in water where he tossed his line." Fresh-baked apple pies on his doorstep; greeting cards in his mail smelling of lavender perfume; the giggles and the twirling of hair.
But when he saw my grandmother, there were no outward signs of her affection for him. His feelings were internal. "I was," he mused, "drawn to her like a hummingbird to hibiscus. I fell, and I continued to fall for the next 43 years."
They don't make'em like my grandpa anymore!
There's a lot about this story, though, that reminds me of mainstream finance. Like my grandfather prior to "falling" in love, Wall Street pundits have a tendency to follow markets that have already made their price trends known. Then, they look for outward signs (i.e., "fundamentals") to confirm those moves.
Take, for example, the recent performance in US Natural Gas Fund (UNG). On April 18, this natural gas price tracking ETF soared to its highest level since January 2019. Wrote Seeking Alpha on April 15,
"Off To The Races: Natural Gas Equities Extend Their Lead Versus FAANG Stocks. A historic capital rotation has gone from a quiet murmur in the distance in 2021 to a full roar front and center in 2022. Energy equities, led by natural gas equities, are leading the rally."
By now, UNG's hot, hot, hot price trend was well established. In the run-up to these "insane" levels, the popular pundits stepped in to explain why the ETF was on fire.
Meteorological - from Marketwatch on April 15:
"$7 natural gas price is insane, and well beyond all pricing models we had run until now."
"The catalyst behind this week's rally.. has been a 'late season blast of cold weather making its way across the country... A pipeline outage in Alabama took some natural-gas supply offline for an 'indefinite amount of time,' contributing to the price climb."
Geopolitical - from CNBC on April 18:
"Natural gas surges to highest level since 2008 as Russia War Upends Energy Markets. The U.S. is now sending record amounts of liquefied natural gas to Europe, which is lifting Henry Hub prices.
"LNG exports have taken on more significance with geopolitics and demand from both power generation/ industrial usage are strong. The US role as an exporter continues to increase."
Whether the US is truly at risk of running out of natural gas reserves is an interesting topic. I highly recommend reading the February 18 Brookings Institute paper titled "Now is Not the Time to Limit U.S. Natural Gas Exports" which includes this informative infographic showing a rising trend in US natural gas production.
But for our purposes, the issue is timing.
The cold weather blasts across the US occurred in March and April. The perceived drop in US natgas supplies due to war-imposed sanctions in Russia have occurred since Putin declared his "special military operation in Ukraine" on February 24.
Yet, the rally in the natural gas ETF UNG has been underway since early February -- before either "bullish catalyst" was known.
In turn, the true cause of the market's rally wasn't an outward event that simply confirmed a trend already underway. It was, as my grandpa described, something within. For him, that feeling was love. For UNG, that was collective investor psychology, which unfolds as Elliott wave patterns on the market's price chart.
On February 11, our Energy Pro Service analyst Steve Craig showed this chart of UNG, which cleared the path for a powerful rally. From Steve's analysis:
"UNG should be in the final throes of the wave ((ii)) retracement... At this point, trade above 4.056 in the futures would offer an aggressive hint that a bottom of some magnitude is in place. If the wave ((iii)) advance is underway, a sizable five-wave rally should unfold."
From there, UNG began a stairstep climb higher. On March 14, Energy Pro Service confirmed that the ETF "should extend the advance in an impulsive manner."
And, this next chart captures UNG's powerful ascnet to 2-year highs on April 18.
The last trading day of the week on April 14, our Energy Pro Service warned that a small-degree fourth wave pullback was "drawing near." And, from its April 18 peak, UNG has indeed turned lower.
When it comes to models of financial forecasting, there are plenty of "fundamental" fish in the sea.
But if you want analysis that assesses the internal patterns underway in the world's leading energy markets, all the while providing objective price levels to help manage risk, then our Energy Pro Service is your ideal match.
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