In this article, we examine the significant weekly order flow and market structure developments driving XLE price action.
13-18 January 2019:
As noted in last week’s XLE Weekly, the primary inference for this week was for buy-side activity within the context of a structural unsecured high last week. This week’s auction saw two-sided trade within last week’s balance before a buy-side breakout developed in Friday’s auction to 63.89s.
This week saw selling interest, 61.53s, in Monday’s auction near key support. The sellers trapped as rotation higher within the developing balance unfolded through Tuesday’s auction. A minor probe higher to 62.67s developed Tuesday as a sell excess developed with price rotation back into the prior balance. Narrow, two-sided trade developed through Wednesday’s auction as buyers trapped, 62.12s/62.10s.
The trapped buyers of Wednesday’s auction drove price lower early into Thursday’s auction, retesting key support, achieving a stopping point, 61.39s. Buying interest emerged there, rejecting the low, driving price higher back through the range before another probe higher developed to 62.84s late in Thursday’s auction as buying interest emerged, 62.60s, into Thursday’s close. A gap higher developed in Friday’s auction as price discovery higher developed, achieving the stopping point high, 63.89s, settling at 63.84s.
This week’s auction saw price discovery higher, consistent with our primary expectation, although the bulk of the week’s auction was balance development building consensus before the buy-side breakout late in the week. Within the broader context, this week’s buy-side continuation occurred following the structural stopping point low of December 2018. The market has now auctioned into the initial key supply cluster overhead, 61.60s-64.60s.
Looking ahead, the focus into next week will center upon market response to this week’s unsecured high, 63.89s, developed Friday. This week’s high was unsecured, and this structural formation implies need for repair. The repair itself will either result in sell excess or buy-side continuation. From a structural perspective, the highest probability path this week remains buy-side with the expectation that a meaningful sell response will develop within this key supply cluster at some point in the near-term. Within this near-term context, the intermediate term (3-6 month) bias remains sell-side.
It is worth noting that sentiment based on the S&P Energy Sector Bullish Percent Index now reflects a bounce from the levels of extreme pessimism developed late December into early January. Stocks more broadly, as viewed via the NYSE have now also seen a bounce from a similar level. Asymmetric opportunity develops when the market exhibits extreme bullish or bearish sentiment with structural confirmation. Within the context of a seasonal low period (December-January), the market developed a stopping point low within prior key demand. The market activity has formed a price low following the momentum low of November 2018 which serves as meaningful support.
The market structure, order flow, and sentiment posture will 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.