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 within the context of a continuing corrective phase. This probability path did play out, albeit in an unconventional way, early week as balance developed before buying interest drove price higher to 2.33s near key supply where selling interest emerged, driving price lower to 2.07s, probing key support ahead of Friday’s close, settling at 2.14s.
28 July - 02 August 2019:
This week’s auction saw selling interest in Monday’s auction driving price lower from last week’s settlement, achieving a stopping point, 2.10s. Buying interest emerged there, halting the sell-side sequence, developing balance, 2.10s-2.14s, through Tuesday’s NY close. Buying interest emerged, 2.14s-2.15s, in Wednesday’s trade, driving price aggressively higher, achieving a stopping point, 2.26s. Buyers trapped, 2.26s-2.25s, halting the buy-side sequence, developing balance, 2.26s-2.23s, into Wednesday’s NY close.
Buying interest emerged, 2.24s-2.26s, in Thursday’s auction, driving price higher, achieving the weekly stopping point high, 2.33s into the EIA release (+65 bcf v +57 bcf expected). Buyers trapped amidst structural sell excess, halting the buy-side sequence, driving price lower to 2.20s as buying interest emerged into the NY close. Thursday’s late buyers failed to hold the auction as price discovery lower continued to key support, 2.10s. Selling interest emerged there, driving price modestly lower in a sell-side breakdown attempt, achieving the weekly stopping point low, 2.07s. Sellers trapped there ahead of Friday’s close, settling at 2.20s.
This week’s primary expectation of price discovery lower did unfold, albeit modestly, following a buy-side phase to 2.33s. A new 2019 low was made at 2.07s on a failed sell-side breakdown. This week’s auction occurs within the context of a corrective phase following the structural low development within the four-year major demand cluster, 2.20s-1.50s.
Looking ahead, this week’s sell-side sequence and failed breakdown are of note. Focus into next week centers upon market response to this week’s sell-side breakdown area, 2.16s-2.10s. Sell-side failure at this key cluster will target the key supply clusters overhead, 2.30s-2.35s/2.45s-2.49s, respectively. Alternatively, buy-side failure to drive price higher at this key cluster will target key demand clusters below, 2.08s-1.94s/1.77s-1.61s, respectively. From a structural perspective, the highest probability path this week is sell-side within the context of a continuing corrective phase. The four-year demand cluster, 2.20s-1.50s, which we have noted for months and which the market finally revisited, remains key to the larger structural view. In the intermediate term (3-6 month) context, conditions in the leveraged capital posture are showing signs of potential for structural low formation.
It is worth noting that despite the approximately 56% decline from the November 2018 high, only in recent weeks has the Managed Money (MM) short posture begun to reach levels consistent with structural low formation (typically 300-350k contracts). It is also worth noting that MM net posture flip noted weeks ago continues (-223k contracts). This development implies that MM sentiment has finally turned to a bearish view as price reaches lows, most notably 4-year demand, 2.20s-1.50s. In the last 2 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 has now reached quantity needed to develop structural lows. This development is likely now underway.
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.