In this article, we examine the significant weekly order flow and market structure developments driving NG price action.
As noted in last week’s NG Weekly, the highest probability path for this week was for price discovery lower barring 1.88s failing as resistance. This probability path did not play out as a failed probe lower of key support to 1.80s developed early week. Price discovery higher then ensued to 1.90s, testing key resistance in Thursday’s trade before balance developed ahead of Friday’s close, settling at 1.85s.
02-07 February 2020:
This week’s auction saw price discovery higher to 1.88s, key resistance, in Monday’s trade as last Friday’s late buyers held the auction. Low volume selling interest emerged there, driving price lower, achieving a stopping point, 1.81s, where buying interest emerged, 1.81s-1.82s, into Monday’s NY close. A failed probe lower developed, achieving the weekly stopping point low, 1.80s, upon Monday’s Globex reopen. Buy excess developed, driving price higher back above key support to 1.88s where buying interest emerged, 1.86s-1.88s, into Tuesday’s NY close. Tuesday’s late buyers failed to hold the auction as a pullback developed early in Wednesday’s trade to 1.82s. Sellers trapped, 1.82s-1.84s
Tuesday’s late buyers failed to hold the auction as a pullback developed in Wednesday’s trade to 1.82s. Sellers trapped there, 1.82s-1.84s, as rotation higher to 1.86s into Wednesday’s NY close. Price discovery higher continued to 1.89s upon Wednesday’s Globex reopen where selling interest emerged at key resistance. Rotation lower developed early in Thursday’s auction to 1.83s as buying interest emerged, 1.83s-1.84s. Buyers held the auction through the EIA release (-137 bcf vs. -129 bcf expected), driving price higher, achieving the weekly stopping point high, 1.90s. Structural sell excess developed there as buyer trapped, driving price back into prior balance as the breakout attempt failed. Balance trade developed, 1.84s-1.89s, ahead of Friday’s close, settling at 1.85s.
This week’s primary expectation of price discovery lower did not develop as a minor probe lower through key support developed to 1.80s into the four-year demand cluster. Buy excess developed there, driving price higher to 1.90s in a failed buy-side breakout above key resistance into Thursday’s auction. Narrow balance developed into the week’s end.
Focus into next week remains upon market response to the developing balance cluster, 1.82s-1.90s. Buy-side failure to drive price higher from this area will target major support below, 1.60s. Alternatively, sell-side failure to drive price lower from this area will target key supply clusters above, 1.91s-1.98s/2.10s-2.17s, respectively. The highest probability path, near-term, remains sell-side, barring failure of 1.90s as resistance. The failure of 2.15s as support remains structurally significant. The four-year demand cluster, 2.20s-1.50s, which we have noted for months and which the market revisited, remains key to the larger structural view. In the intermediate term (3-6 month) context, conditions in the leveraged capital posture reflect signs of potential structural low formation as the market trades to this major demand area. While the sell-side bias remains, trade is becoming constricted following the approximately 38% decline from the November 2019 high, warranting caution on the sell-side.
It is worth noting that despite the approximately 59% decline from the November 2018 high to the August 2019 low, only from June through early September 2019 had the Managed Money (MM) short posture begun to reach levels consistent with structural low formation (typically 300-350k contracts). MM short posture peaked the week of 13 August (-367k contracts) declining into mid-November (-201k contracts). This development implied that MM sentiment reached extreme bearishness as price reached lows resulting in the rally from 2.02s to 2.90s. In the last 2 instances of this development (March 2016 and December 2017), NG subsequently rose from 1.70s to 3.25s and 2.65s to 4.5s, respectively. This week’s data shows MM net short posture increase (-315k contracts), a fourteen-year low as Open Interest (OI) increased modestly.
The MM short posture stands at -505k contracts, a new fourteen-year high. The MM long:short ratio and MM net long position as % of open interest remain at levels typically consistent with structural low formation. MM posture reached quantity needed to develop structural lows from July-September 2019. This development is likely now underway, but the near-term bearish structure must be acknowledged. MM posture is now reflecting extreme pessimism with leveraged capital materially increasing short exposure at/near major lows. This type of development warrants caution on the sell-side as this type of herding behavior generally creates potential for abrupt price movement in the opposite direction.
The market structure, order flow, and leveraged capital posture provide the empirical evidence needed to observe where asymmetric opportunity resides.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.