Buy-side breakout in Monday’s auction results in sell excess halting auction as breakout fails.
Rotation lower to key support into mid-week; sell-side breakdown ensues to 68.84s.
Bullish sentiment reached extreme and has topped out.
In this article, we examine the significant weekly order flow and market structure developments driving XLK's price action.
As noted in last week's XLK Weekly, the highest probability path for this week was for price discovery higher as the market continued to seek a price where the buy-side auction would be shut off. A buy-side breakout did develop early this week to 71.82s, where sell excess developed rejecting the high, driving price lower back into prior balance. Balance development then ensued, 70.28s-71.12s, through mid-week before a sell-side breakdown developed, driving price lower to 68.84s into Friday's auction before closing at 69.81s.
04-08 March 2019:
This week saw a buy-side breakout develop early in Monday's auction, driving price higher through last week's unsecured high, achieving the stopping point, 71.82s. Selling interest emerged there, rejecting the high as structural sell excess formed, 71.82s-71.60s, before price traded back into prior balance, achieving a stopping point, 70.28s, ahead of Monday's close. Two-sided trade developed, 70.28s-71.12s, through Wednesday's auction before buying interest emerged, 70.49s-70.59s, into Wednesday's close.
Wednesday's late buyers failed as a sell-side breakdown developed in Thursday's auction through key support. Price discovery lower continued into Friday's auction as a gap lower resulted in a flush of the market, achieving a stopping point low, 68.84s, as structural buy excess developed near key demand. Rotation higher developed in Friday's auction to 69.64s, closing at 69.81s.
This week's auction saw a failed buy-side breakout early week to 71.82s above last week's unsecured high as structural sell excess developed. The sell excess was structural indication that the buy-side auction had been halted. As noted in recent weeks, this development was likely within this major supply area. Following the sell excess, the market balanced before selling interest drove price lower in a sell-side sequence, achieving the stopping point low, 68.84s, early into Friday's auction near key demand where a structural buy excess developed.
Looking ahead, the focus into next week will center upon market response to this week's stopping point low, 68.84s, and late-week buy excess. Sell-side failure to drive price lower through this key demand would target key supply clusters overhead, 70.40s-70.60s/70.80s-71.40s. Failure of the buy-side to defend this area would target key demand clusters below, 67.60s-67.20s/65.18s-64.26s. From a structural perspective, the highest probability path into next week remains buy-side with the expectation that a meaningful sell response could develop within the key supply cluster, 70s-71.30s, at some point in the near-term. It is also worth noting XLK's close this week is the first lower close in the last nine weeks. Within this near-term context, the intermediate-term (3-6 month) bias remains neutral between 57.57s and 76s.
It is worth noting that sentiment based on the S&P Technology Sector Bullish Percent Index now reflects a dramatic move from the levels of extreme pessimism developed late December/early January now to levels of extreme optimism. Stocks more broadly, as viewed via the NYSE, have now also seen a bounce from a similar level, albeit more muted. 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. Following the momentum low of November 2018, recent market activity has formed a price low which now serves as meaningful support. The market has auctioned from levels of extreme pessimism and now trades near extreme optimism into 2017's area of extreme bullish sentiment. This week's auction saw the first decline in sentiment since the beginning of this rally phase. As noted last week, this warrants caution regarding further buy-side potential for technology shares. Current key supply, 70.25s-71.81s, becomes more structurally significant given the development of a structural stopping point high.
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.