Natural Gas ETF Could Blow Up in Your Face

Before I get to the topic du jour — why traders should not consider a long position in natural gas — I want to take a quick look at the broad market. Stocks have been on a tear during the past two weeks, and bullish sentiment has been growing stronger. Many low-risk swing traders are having a tough time getting in on the market action because there have not been many sizable pullbacks. Instead, thanks to extreme bullishness we are seeing, prices have been inching higher with very minor pullbacks before surging again.

The only way to take advantage of this type of price without taking on a lot of risk is to take small positions when the market drops to the 5-day, 10-day or 14-day moving averages with a mental stop to exit the position if the market closes below the 14-day. Any position you take here should be small because the market is in runaway mode, meaning everyone is buying on the smallest of dips. The largest moves tend to be near the end of a trend, which is why I feel this market could keep running for a few more weeks before taking a sharp plunge.

Natural Gas

If you have been reading my work over the past year, then you should know I don’t like natural gas. More people have lost money trying to play natural gas than any other investment vehicle out there, which is why I don’t cover it very often. But since many of you have been asking about it, I’ll share my thoughts.

Natural gas ETF, the United States Natural Gas Fund, LP (NYSE: UNG) has been in a downtrend for several years, and the only trades should be entered at this time are short positions. The argument from some is that it’s undervalued, and with winter just around the corner, prices should go up. It’s a valid argument, but price action is what makes traders money, not fundamentals.

UNG’s daily chart below shows what I feel is about to happen. Remember, UNG is a terrible fund to be buying. Unless natural gas is moving strongly in your favor, this fund continually loses value simply because of the way it was created.

Looking at the actual natural gas commodity chart is a different story. The trend is still down, but it does look as though it’s trying to form a base. That being said, there is still a very good chance we see gas test near the $3 level before starting a new trend, so trying to pick a bottom here is not something I would be doing.

Trading Conclusion

In short, the equities market is still in a strong uptrend. I’m not comfortable taking any large positions at this stage of the game, but if we get a good setup, I will not hesitate to enter with a little money.

As for natural gas, trying to pick a bottom is deadly in a downtrend as bounces tend to be short lived or flat.

You can get my ETF Trade Alerts for Low-Risk Setups here.