The natural gas futures contract has completed a multi-year bottoming pattern near $3.00 per million British thermal units (MMBtu) and broken out above 2016 resistance, entering the first bull market since 2008. Geopolitical tensions, low inventories and weather-related demand have been cited for the new uptrend, which is unfolding at the same time that crude oil and other physical commodities are posting multi-year highs.
Sadly, the US Natural Gas Fund (UNG) doesn’t show this secular breakout following years of contango. This poorly understood concept measures the distortion between a commodity’s spot market price and exchange-traded fund (ETF) mathematics that roll holdings from one front-month futures contract to the next. As a result, market players wishing to avoid direct futures exposure may want to own these three natural gas stocks set to benefit from the new uptrend. (For more, see: Got a Commodity ETF? Watch Out for Contango!)
Southwestern Energy Company (SWN) entered a powerful uptrend at the start of the previous decade, splitting three times during an advance that topped out at $52.69 in 2008. It tested resistance in 2010, 2011 and 2014 but failed to break out, finally rolling over in a steep decline that hit a 14-year low in February 2018. A bounce into June mounted broken 2016 support at $5.00, setting off a modest buying signal ahead of sideways price action into the fourth quarter.
The stock is building a base across the 200-day exponential moving average (EMA), which has marked resistance since 2014. The on-balance volume (OBV) accumulation-distribution indicator has risen to the highest level since October 2017, signaling steady accumulation. This positioning will issue a more potent buying signal if the stock can break range resistance at $5.67. Upside may be significant, with the .382 Fibonacci retracement of the two-year selling wave near $8.00 marking a logical target. (See also: Natural Gas Industry: An Investment Guide.)
Chesapeake Energy Corporation (CHK) broke out above the 1996 high in the mid-$30s in 2008, posting an all-time high at $74 a few months later, and reversed in a downtrend that finally ended in February 2016. The company made unwelcome headlines one month after posting a 17-year low at $1.50 when CEO Aubrey McClendon was killed in an auto accident going 89 MPH without a seat belt, just one day after being indicted on bid rigging charges.
A strong uptick stalled below $8.00 a few months later, generating a shallow but persistent decline, followed by a May 2018 rally that settled around the 200-day EMA in August. Chesapeake Energy stock bounced at that level in September and has now carved a small basing pattern with resistance at $4.90. A breakout should generate fresh buying interest, lifting the stock back to the 2016 high, which marks the final barrier ahead of a new uptrend. (For more, see: The Biggest Risks of Investing in Chesapeake Energy Stock.)
Gulfport Energy Corporation (GPOR) came public at $15.00 in 2006 and topped out in the $20s in 2007. It fell to an all-time low at $1.50 in 2009 and turned higher, rallying to a new high in 2011. The stock posted an all-time high at $75.75 in 2014 and entered a downtrend that hit an eight-year low in February 2018. A bounce into mid-year stalled near the 200-day EMA, settling into a mixed pattern that has carved six failed attempts (red line) to mount that level in the past two months.
Accumulation has improved since June, with bottom fishers and value players opening new positions. A rally above $12 would signal a bullish change in character, remounting the moving average while initiating a test of the 2018 high at $13.41. That would improve the technical outlook, but overhead supply could affect the nascent uptrend until price action reaches the September 2017 high near $15, ending the multi-year string of lower highs and lower lows. (See also: A Natural Gas Primer.)
The Bottom Line
Natural gas has entered the first bull market since 2008, favoring much higher prices in the sector’s beaten-down equities. (For additional reading, check out: Top 4 Natural Gas Stocks.)