Natural Gas Spot prices look ripe for a correction following this overbought run into resistance with negative divergences in place (first chart below) while $NG (nat gas futures) looks rip for a pullback following the breakdown & backtest of this ascending price channel & divergent high. GAZ & UNG are two natural gas exchange traded products (ETPs) which also appear to offer limited, if any, upside in the near future with the most likely scenario a correction ranging from 10-17% in natural gas prices. My preferred proxy for shorting natural gas is the 3x bullish natural gas etn, UGAZ which will be added as an Active Short Trade at or around current prices (47.30).

The primary reason that I prefer to short the 3x bullish ETN vs. buying the 3x bearish ETN, DGAZ, is the fact that 3x leveraged ETPs, particularly those that track very volatility underlying sectors or commodities, such as natural gas, are prone to price decay over time. For example, natural gas futures have gained 28.48% YTD while UGAZ has not only failed to post what some might expect to be a 300% return above that, or about 85% gain YTD, it has actually lost about 19% in value so far this year. Had one held UGAZ since it started trading back in February of 2012, your losses would now be in excess of 99% (i.e.- you would have lost nearly all your money due largely to the price decay with essentially no chance of ever coming close to breaking even at this point as UGAZ would have to gain about 13,000% to get back to where it initially started trading.)

The longer the 3x ETPs are held & the more choppy the price action over the period when they are held, the worse the decay. However, there are some instances where the 3x leverage ETFs can actually post returns in excess of 300% of the underlying security, namely during periods of mostly uni-direction trends with very little counter-trend closing values. More on that can be found under the ETF section on the FAQ page of Right Side Of The Chart.

I realize that many don’t have margin accounts or those that do, might trade with a broker that doesn’t have shares of UGAZ to short. My next pick would be to short NG futures but only for those familiar with futures trading and the ability to do so (as many traders don’t have a futures account). That essentially leaves GAZ, UNG & DGAZ or any other natural gas tracking ETPs which might be fine for a trade lasting only a few weeks or so, especially if nat gas prices have already peaked as I suspect they have & begin a relatively uni-direction trend lower from here.

Price targets & a suggested stop(s) will follow asap but I can say that as of now, I am eyeing the 3.55 & then 3.38 levels (actual support) on NG futures.