Conclusion, Investment Implications, Strategy

The United States Natural Gas Fund, LP (UNG) is amid favorable conditions to continue its recent advance as it broke out above a major overhead resistance level on Aug 26th amid relative outperformance versus the benchmark S&P 500.  We view this as a potential diversification opportunity as the S&P 500 has already risen by 107% since March 2020.

Analysis and Rationale

The United States Natural Gas Fund, LP (UNG) seeks to reflect the daily changes in percentage terms of the price of natural gas delivered at the Henry Hub, Louisiana, as measured by the daily changes in the price of a specified short-term futures contract. The fund invests primarily in futures contracts for natural gas that are traded on the NYMEX, ICE Futures Europe and ICE Futures U.S. or other U.S. and foreign exchanges. The Benchmark Futures Contract is the futures contract on natural gas as traded on the New York Mercantile Exchange that is the near month contract to expire, except when the near month contract is within two weeks of expiration.

The green highlights in Chart 1 below show that UNG has risen above its $14.58 August 2020 benchmark high as of Aug 26th after first testing and failing at that level on Aug 4th. 

Chart 1

This breakout above formidable overhead resistance clears the way for further gains while the $14.58 area now becomes underlying support.

Meanwhile, the upper panel of Chart 2 below shows that UNF has just made a successful test of its 50-day moving average, a widely-watched minor trend proxy currently situated at $13.44, on Aug 19th. Previously, the ETF confirmed a major bullish trend change on Jun 8th by rising and remaining above its 200-day MA, a major trend proxy.

Chart 2

The green highlights in the lower panel show that the daily relative performance line between UNG and the benchmark SPDR S&P 500 ETF Trust (SPY) shifted to a trend of Strategic relative outperformance on May 12th by rising and remaining above its 63-day (quarterly) day moving average.  More recently, UNG began a new trend of annual relative outperformance versus SPY on Jun 30th by rising above its 252-day MA.

Combined, these charts suggest a new buying opportunity – as well as an opportunity to outperform the benchmark S&P 500.  A sustained rise above the $13.44 area would target an additional 21% rise to $17.74. 

Table 1 below shows that considering the aforementioned upside target and a protective stop placed below the $13.98 area, a long entry price of $14.71 would provide a 1:4.2 risk/reward ratio (risking $1.00 to make $4.20) with an initial risk of 5.0%.

Table 1

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Please consult the table showing our Asbury 6 key market metrics to help determine if this investment is suitable for you.