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 higher following last Friday’s structural buy excess development which halted the sell-side sequence from 2.26s. This probability path did play out as price discovery higher developed early week to 2.24s within key supply where selling interest emerged. Price discovery lower then developed to 2.17s where sellers trapped, driving price higher to 2.26s into Thursday’s auction. Buying interest emerged there, driving price higher in buy-side breakout to 2.31s ahead of Friday’s close, settling at 2.28s.
25-30 August 2019:
This week’s auction saw price discovery higher in Monday’s auction from last week’s settlement, achieving a stopping point, 2.24s, within key supply overhead, 2.22s-2.27s. Buyers trapped amidst selling interest there, halting the buy-side sequence ahead of Monday’s NY close. Selling interest emerged in Tuesday’s Globex auction, 2.22s, driving price lower, achieving a stopping point, 2.17s. Sellers trapped there, halting the sell-side sequence as both selling and buying interest emerged, 2.18s-2.20s, ahead of Tuesday’s NY close.
Price discovery higher resumed in Wednesday’s auction, achieving a new stopping point, 2.28s, as buying interest emerged at the prior key resistance. Buyers trapped there amidst selling interest, 2.28s-2.26s, driving price lower in retracement to 2.21s ahead of Wednesday’s NY close. Rotation higher to test 2.28s resumed early in Thursday’s trade before sellers trapped there into the EIA release (+60 bcf vs. +57 bcf expected), driving price higher, achieving the weekly stopping point high, 2.31s. Minor structural sell excess developed there as buyers trapped, driving price lower in retracement to 2.25s ahead of Friday’s close, settling at 2.28s.
This week’s primary expectation of price discovery higher did unfold as last week’s structural buy excess held as support and price discovery higher developed to 2.31s into Thursday’s auction where selling interest halted the auction. This week’s auction occurs as a buy-side continuation within the buy-side sequence begun from major support, 2.02s, following the structural low development within the four-year major demand cluster, 2.20s-1.50s.
Looking ahead, this week’s auction saw price discovery higher to 2.31s where key supply developed, 2.31s-2.29s. Focus into next week centers upon market response to this key supply. Sell-side failure to drive price lower from this area will target key supply clusters above, 2.38s-2.43s/2.45s-2.48s, respectively. Alternatively, buy-side failure to drive price higher from this area will target key demand clusters below, 2.20s-2.18s/2.14s-2.12s, respectively. From a structural perspective, the highest probability path this week remains buy-side within the context of an incomplete buy-side sequence from 2.02s. The four-year demand cluster, 2.20s-1.50s, which we have noted for months and which the market has 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 structural low formation.
It is worth noting that despite the approximately 59% decline from the November 2018 high, only since mid-June 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 (-210k 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.