Natural Gas ETFs Burning Brightly

Natural gas prices have been on fire over the past three months due to a stockpile shortage, an unseasonably warm fall that has led to higher-than-usual power demand and nuclear power plant outages in the Carolinas caused by Hurricane Florence.

Commodity analysts believe that the upcoming winter is likely to determine how the stockpile shortage plays out into 2019. Michael Cohen, head of energy markets research at Barclays, told CNBC, "If winter weather comes in mild, then this current storage shortfall is a speed bump on the way to a looser market in 2019. If cold weather comes to fruition, though, the tenor of the 2019 outlook is fundamentally changed, and the market will spend a good portion of next year just digging out of the storage deficit."

Those who wish to trade the commodity should keep an eye on these three exchange-traded funds (ETFs). Let's look at several tactical trading ideas.

The VelocityShares 3x Long Natural Gas ETN, created in February 2012, attempts to provide three times the daily performance of the S&P GSCI Natural Gas Index. The fund invests in natural gas producers in Organization for Economic Co-operation and Development (OECD) countries. UGAZ has returned an impressive 49.67% over the past three months – in the past month alone, it has returned 17.21% as of Oct. 25, 2018. The ETN charges an annual management fee of 1.65% – higher than the 0.99% category average.

The fund's price traded in a roughly 20-point range between March and August before staging a strong rally in September. The price is forming a pennant pattern on the far right-hand side of the chart, which suggests continuation to the upside. Traders should look for an entry point above the pennant's upper trendline, with a stop-loss order sitting near the 50-day simple moving average (SMA). Profits could be taken at the $115 level using the measured moved technique – simply calculating the move that proceeded the pennant and adding it to the breakout point ($25 + $90).

Launched in 2011, the ProShares Ultra Bloomberg Natural Gas ETF seeks to match twice the daily returns of the Bloomberg Natural Gas Subindex. The tracked index reflects the price performance of natural gas futures contracts. As of Oct. 25, 2018, the fund has returned 12.92% over the past month and 29.98% over the past three months. BOIL has an expense ratio of 1.31%.

The ETF pushed above trading range resistance between $30 and $31 on above-average volume that gives the breakout validity. Natural gas bulls should also be encouraged by the recent "golden cross" – when the 50-day SMA crosses above the 200-day SMA – which suggests a trend change to the upside. Traders should consider taking an entry on a breakout above the pennant pattern that has been forming throughout October. Traders could book profits at the $43 level using the measured move method ($7 + $36) and set a stop below the candlestick that broke away from the previous day's doji on Oct. 1.

Formed in April 2007, the United States Natural Gas ETF holds natural gas front-month futures and swaps. The ETF has a low average spread of 0.04%, which makes it a suitable instrument for both day and swing trading. It has a reasonable annual management fee of 0.7%. UNG has a one-month return of 5.94% and a three-month return of 16.4% as of Oct. 25, 2018.

UNG made a year-to-date high in October, something that both UGAZ and BOIL have been unable to achieve so far this month. Rising volume accompanied the September/October move higher, which suggests institutional interest in the fund. The ETF's price looks to be consolidating in a pennant before its next push higher. Traders could think about going long on a break above the pattern's upper trendline with a stop-loss order sitting just below the Oct. 1 low. The measured move method projects a profit target at the $30 level ($3 + $27).