In this article, we examine the significant weekly order flow and market structure developments driving XLE price action.
As noted in last week’s XLE Weekly, the primary inference for this week was for price discovery higher provided last week’s buy-side breakout area, 64.05s-63.80s, held. This week’s auction did see buy-side defense of the breakout area in Monday’s auction before price discovery higher developed to 65.25s at/near key resistance. Self-similar selling interest emerged there mid-week, developing balance before a sell-side breakdown developed to 61.87s in Friday’s auction where sellers trapped, developing balance through Friday’s auction before closing at 62.94s.
03-08 February 2019:
This week’s auction saw pullback early week, achieving a stopping point, 63.97s, within last week’s key buy-side breakout area, 64s-63.80s, in Monday’s trade. A structural buy excess developed amidst key demand, driving price higher into early Tuesday’s auction, achieving the stopping point high, 65.25s. Selling interest emerged there, developing balance through Wednesday’s auction, 65.25s-64.60s. Buying interest in size developed, 64.64s-64.73s, ahead of Thursday’s auction.
Wednesday’s buying interest and key support failed in Thursday’s auction as a gap lower open developed early in Thursday’s trade. Aggressive price discovery lower developed through Thursday’s auction, achieving a stopping point, 62.64s. Buying interest emerged there, developing balance, 62.64s-63.30s, into Friday’s auction. Buyers trapped, 63.24s, late in Thursday’s auction before sell-side continuation developed, achieving the stopping point low, 61.87s, in Friday’s auction. Buy excess developed there, driving price higher in retracement to 63.21s ahead of Friday’s close, settling at 62.94s.
This week’s auction saw buy-side defense of key support, consistent with our primary expectation, until late in the week at which time initiative selling interest drove price lower to 61.87s, toward the high-volume node, 62.08s, within the key demand cluster below, 62.50s-61.30s. Within the broader context, this week’s development of balance occurred near prior major supply overhead, 61.60s-64.60s, before this week’s sell-side phase began.
Looking ahead, the focus into next week will center upon response to this week’s stopping point low, 61.87s, for confirmation/negation of that level as support. This week’s buy excess, 61.87s-62.05s, is structural indication of a potential termination of the sell-side bias in the near-term. From a structural perspective, the highest probability path this week shifts to neutral, 62.05s-63.30s, as the initial corrective phase is digested by the market. Generally, corrective phases occur within a three-wave sequence. This week’s phase would likely represent the first wave of that sequence. As noted in recent weeks, the significance of the near-term relief rally into key supply within the intermediate-term (3-6 month) sell-side bias implied growing potential for meaningful sell-side activity. This selling event began within this context.
It is worth noting that sentiment based on the S&P Energy Sector Bullish Percent Index has now turned down modestly following the 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 which now serves as meaningful support following the momentum low of November 2018. While near-term buy-side activity may be extended, sentiment remains far from a posture of extreme optimism, implying a longer-term structural high is unlikely to develop in this area.
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.