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. This probability path did play out as last week’s key support, 2.54s, failed ahead of Friday’s close, settling at 2.54s.
24 – 31May 2019:
Following last Friday’s minor rally from last week’s key support, 2.54s, this week’s auction saw minor pullback in Monday’s trade, driving price modestly lower to 2.56s where sellers trapped ahead of the NY close. Narrow, two-sided trade continued early in Tuesday’s auction before a false breakdown developed to 2.54s. Buyers entered there amidst a buy excess, halting the sell-side sequence as the breakdown failed. Minor rotation higher developed to 2.59s as sellers emerged into Tuesday’s NY close. Tuesday’s late sellers failed to hold the auction as price discovery higher developed early in Wednesday’s auction.
Price discovery higher developed in Wednesday’s trade, achieving the weekly stopping point high, 2.64s, near last week’s key supply overhead. Buyers trapped there in size amidst selling interest into Wednesday’s NY close. Wednesday’s late buyers failed to hold the auction as price discovery lower developed through early Thursday’s trade. A stopping point developed, 2.53s, into the EIA release (+114 bcf v +101 bcf expected), where large selling interest emerged into Thursday’s NY close. Thursday’s sellers failed to hold the auction as minor price discovery higher developed early in Friday’s trade to 2.57s. Buyers trapped there, driving price lower to key support, where selling interest emerged, driving price aggressively lower to 2.46s ahead of Friday’s close, settling at 2.54s.
This week’s primary expectation of price discovery lower did develop as balance early week was followed by selling at key resistance and supply, driving price lower to 2.45. This week’s auction occurs within the context of rotation lower toward 2019’s major support, 2.44s.
Looking ahead, the near-term bias (2-4 week) remains sell-side. This week’s sell-side auction develops following the corrective phase begun in April toward 2.70s as the market is now poised to test major support. Focus into next week centers upon market response to this year’s major demand cluster, 2.48s-2.44s. Buy-side failure to hold the auction there will target key demand clusters below, 2.29s-1.95s/1.80s-1.60s, respectively. Alternatively, sell-side failure in this area targets the key supply clusters overhead, 2.67s-2.70s/2.85s-2.90s, respectively. In the intermediate term (3-6 month) context, while a structural low has developed at 2.44s, the subsequent failure of the buy-side to defend key demand, 2.54s, implies price discovery lower is now possible.
It is worth noting that despite the approximately 50% decline from the November 2018 high, the Managed Money (MM) short posture is not yet consistent with quantities consistent with structural low formation (typically 300-350k contracts). It is also worth noting that MM net posture has flipped from long to short (-32k contracts). This development implies that MM sentiment has finally turned to a bearish view as price reaches lows. In the last two 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. MM posture is approaching the needed quantities implying a structural low will be developing in weeks/months ahead.
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.