Energy commodities are making new headlines and that leads me to the question of how do we make money in the sector? That is generally easier said than done when it comes to trading commodities. Thankfully the ETF world has made the job easier to track and manage than dealing with the futures contracts for the average investors. The complexity of these contracts has always been a challenge. Thus, with the theme of keeping it simple in mind lets look at three commodity ETFs that are in position to move up or down in their respective space in the energy commodities sector.
First, oil is trading at $97 per barrel for WTI Crude. The chart below shows the price of crude over the last twelve months. As you can see very clearly there is a distinct trading range in play, but equally we can see the uptrend in play off the July lows. Resistance is pegged near the $98.30 level and the key level of support near $93. Thus, I say we have to respect the range and current activity on the chart. There are plenty of discussions and arguments on the supply/demand relative to fundamentals of the equation, but they have been ignored for the most part of late. Thus, look for a test or pullback near term in crude. If you are long, you may want to sell or hedge your positions. On the other side, I am not convinced the short play will work near term. There may be more consolidation between $98 and $95.50 before another test of the bottom end of the range. OIL, iPath Crude Oil Index ETN is one way to play crude on the upside and the downside is SCO, ProShares UltraShort Crude ETF (this is 200% leveraged). The unleveraged short ETF has little to no volume.
Second, Natural Gas (UNG) which has some nice gains since the low in February. That said, the ETF is encountering some resistance at the downtrend line as well at the $22 level. If you look at the longer term chart of the commodity itself you would see the $4 high from October and November is posing some resistance short term. If we look solely at the charts, we would have to wait to see if it can break above the $4 level, hold and continue higher. If we add the fundamentals to the picture, we are exiting winter demand and not quite into the summer demand period. That would leave me to be believe the $4 resistance likely has some teeth in the resistance. Watch, raise your stops to protect your gains and let it ride out or take half off the table, raise your stops and let it play out. Either way the key is to protect some gains near term.
Third, Gasoline is the final energy commodity to watch short term. As you can see with UGA, United States Gasoline ETF, the peak in price came back in mid-February and has steadily declined since. The supply shortage created by the maintenance of the refineries and other issues in January are being settled and they are back to running normally. Equally the transition from winter gasoline to summer is nearly complete. On the chart the downside is in play short term, and with the first key support level at $59.60, and the close on Tuesday at $60, does gasoline move lower? The wholesale price is at $3.04 and the support is $3. If the price breaks below this support the ETF will move lower as well. Watch and be patient as this opportunity unfolds. The pressure is on the downside short term.
Trading commodity ETFs is not the perfect solution, but it does offer the average investor a more simplified way of putting money to work in these areas. Measure the risk before you invest, and understand the unique tax consequences that may apply to some of the ETFs as well.