Utilities Rise while Natural Gas Wobbles

When we last wrote about natural gas in early August, we observed that a possible bottoming formation was in play, given the short-term price action following the summer's steep decline in the commodity's value.

Over a month later, natural gas prices, as reflected by the United States Natural Gas Fund ETF (NYSE ARCA: UNG), continue to wrestle with overhead resistance while refusing to give up support below.

The bulls and bears have maintained a tug of war that has left many traders out of this market until it decidedly follows through with a push in one direction or the other. Interestingly, utility stocks, which took a hit when natural gas prices declined over the summer, have recently been displaying some signs of strength.

In this analysis, we present an example of one such utility stock, NRG Energy Inc. (NYSE: NRG) and question whether its recent rise is foreshadowing a near-term upside tick in natural gas prices as well.

NRG vs. UNG: Weekly Chart Comparison

Per Google Finance, NRG Energy Inc. is an integrated wholesale power generation and retail electricity company in the United States, headquartered in Princeton, NJ and employing over seven thousand people.

In comparing the weekly performance of NRG versus UNG, it's evident that both securities took a significant haircut in value beginning in June and extending into early August, as noted by the red arrow on the chart below.

$NRG : NRG Energy Inc. ; $UNG : United States Natural Gas Fund LP

Earlier in the year, the steep rise in natural gas prices that accelerated in March served as a catalyst for utility stocks such as NRG to push higher. Notably, NRG did not price in the rise in UNG immediately; it took several months of consistently higher natural gas prices to sustain a rally in the stock.

What's surprising then is how quickly the fall in UNG had a negative impact on NRG shares. It's clear from the chart - investors wanted nothing to do with the stock as soon as they saw natural gas tanking. NRG fell from a high of over $38 in June to a low of $29.03 by early August.

Now we're seeing an evident disconnect in the price action of NRG versus UNG. While UNG is pretty much flat-lined, wobbling between the $20.50 support and $22 resistance levels, NRG has been steadily rising over the past several weeks.

NRG found support at $29 in August and decisively reclaimed the $30 level by early September. It has not closed below $30 on the weekly time-frame since then, and finished out last week's trading at $31.25 a share.

It was reported in early September that NRG's CEO, David Crane, purchased 5000 shares of the stock on the open market at an average price of $30.49 a share. This disclosure likely supported bullish conviction.

Conclusion

The next resistance level for NRG appears to be the $32 level on the chart. The $30 level is a key support area that should ideally be held by bulls on any pullback in price.

Whether the price action in utilities such as NRG is reflective of an expected rise in natural gas prices remains to be seen. For UNG, bulls would have to ideally push for a close through $22 on the weekly chart and maintain a continued hold above that level to reflect a sentiment shift to the upside in the intermediate term. So far, the $20.50 area has held as downside support.

It's important to keep in mind that the natural gas market is susceptible to being influenced by geopolitics. The existing tension between the Ukraine and Russia is a looming example. Russia supplies much of Europe with natural gas and could potentially use this as leverage as the conflict plays out. Any extended disruption in supply would most certainly support a rise in the commodity's price.