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, our primary inference for this week’s auction was for sell-side activity, following last week’s unsecured low development at 2.65s. This probability path did play out as short covering inventory adjustment developed early week toward key supply before resumption of the sell-side phase developed into Friday’s trade to 2.63s. Rejection of the low developed ahead of Friday’s close to 2.68s, settling at 2.67s.
31 March – 05 April 2019:
This week’s auction saw buy excess develop as sellers trapped, 2.66s, in Monday’s trade, within last week’s key demand. A short covering inventory adjustment then developed through Monday, achieving the weekly stopping point high, 2.73s, near last week’s sell excess. Buyers trapped there amidst selling interest halting the buy-side sequence. Price discovery lower then ensued through Tuesday’s auction, achieving a stopping point in Wednesday’s auction, 2.66s. Large selling interest emerged there, 2.65s-2.66s, failing to drive price lower ahead of Wednesday’s NY close.
Balance development then ensued into Thursday’s auction, 2.66s-2.68s, ahead of the EIA release (+23 bcf v +10 bcf expected). Selling interest emerged, 2.67s, before buyers trapped, 2.65s, upon the EIA release. A sell-side breakdown ensued through key support, driving price lower to 2.64s. Large, two-sided trade emerged around 2.64s as buyers held the auction into Thursday’s NY close. A minor probe lower developed early in Friday’s trade, achieving the weekly stopping point low, 2.63s. The sell-side failed to drive price lower from Thursday’s key cluster and a buy-side rejection of the low ensued, ahead of Friday’s close to 2.68s, settling at 2.67s.
This week’s primary expectation of price discovery lower did develop, as sell-side continuation developed to 2.63s. Buy-side rejection of the low then occurred, driving price back above the sell-side breakdown area, 2.65s-2.66s, ahead of Friday’s close.
Looking ahead, the near-term bias (2-4 week) remains sell-side, as the corrective phase from 2.90s is potentially amidst its third wave. Focus into next week centers upon market response to this week’s key supply cluster, 2.68s-2.69s. Buy-side failure to drive price higher from there will target the key demand cluster below, 2.62s-2.56s. Alternatively, sell-side failure in this area targets the key supply clusters overhead, 2.71s-2.73s/2.76s-2.79s, respectively. In the intermediate term (3-6 month) context, further price discovery lower into major key demand, 2.20s-1.50s, remains possible barring sell-side failure within supply overhead, 2.87s-3.72s.
It is worth noting that despite the approximately 48% decline from the November 2018 high, no material Managed Money (MM) short posture is present. MM short trend may have begun a trend higher in February. It is only with materially larger MM short posture that the market has seen structural lows develop in recent years. This development occurs amidst continued declining market leverage (Open Interest). Based on recent years’ data, current MM posture is not consistent with MM posture that typically contributes to the formation of a structural low. The larger key supply, 2.87s-3.72s, and market response there will remain key.
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.