Buying interest in Monday’s auction, price discovery higher to 2.73s into Thursday’s trade.
Selling interest there and pullback to 2.57s, buying interest there and balance development into week’s end.
This week’s auction saw price discovery higher to 2.73s within key supply overhead.
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 barring failure of 2.36s as support. This probability path did play out as buying interest emerged, 2.50s/2.52s, in Monday’s auction, driving price higher through mid-week to 2.73s into key supply overhead. Selling interest emerged there, developing balance, 2.73s-2.57s, ahead of Friday’s close, settling at 2.70s.
27 October-01 November 2019:
This week’s auction saw a gap higher open in Monday’s auction as last week’s late sellers failed to hold the auction. Buy excess developed amidst buying interest, 2.50s/2.52s. Price discovery higher developed into Tuesday’s trade, driving price higher, achieving a stopping point, 2.70s, where buyers trapped into Tuesday’s NY close. Tuesday’s late buyers failed to hold the auction as price discovery lower developed after Tuesday’s NY close, driving price lower to 2.62s.
Minor balance developed, 2.62s-2.64s, into early Wednesday’s auction, before a minor buy excess developed, driving price higher, achieving a stopping point, 2.72s, where sell excess formed, developing balance, 2.72s-2.66s, into Wednesday’s NY close. Wednesday’s late sellers failed to hold the auction as price discovery higher developed into Thursday’s auction, achieving the weekly stopping point high, 2.73s. Selling interest emerged there into the EIA release (+89 bcf vs. +86 bcf expected), driving price lower to 2.60s into the Thursday’s NY close where selling interest emerged, 2.63s-2.61s. Thursday’s late sellers held the auction as price discovery lower continued, achieving a stopping point, 2.57s. Sellers trapped, 2.60s/2.58s, as price discovery higher developed through Friday’s trade to 2.71s, ahead of Friday’s close, settling at 2.70s.
This week’s primary expectation of price discovery higher did develop as key support held. Price discovery higher developed to 2.73s, within key supply where selling interest emerged, developing balance into week’s end. This week’s auction is a buy-side sequence from the key support, 2.35s-2.20s, within the structural low development in the four-year major demand cluster, 2.20s-1.50s.
Focus into next week centers upon market response to this key supply, 2.65s-2.73s. Sell-side failure to drive price lower from this area will target key supply clusters above, 2.84s-2.89s/3.50s-3.72s, respectively. Alternatively, buy-side failure to drive price higher from this area will target key demand clusters below, 2.55s-2.50s/2.40s-2.35s, respectively. From a structural perspective, the highest probability path, near-term, is buy-side, barring 2.73s holding as resistance. The four-year demand cluster, 2.20s-1.50s, which we have noted for months and which the market revisited, remains key to the larger structural view. In the intermediate term (3-6 month) context, conditions in the leveraged capital posture reflected signs of potential structural low formation as the market traded to this major demand area.
It is worth noting that despite the approximately 59% decline from the November 2018 high, only from June through early September 2019 had the Managed Money (MM) short posture begun to reach levels consistent with structural low formation (typically 300-350k contracts). MM short posture peaked the week of 13 August (-367k contracts) declining into mid-September (-207k contracts). MM net posture remains short (-180k contracts). This development implies that MM sentiment reached extreme bearishness as price reached lows but has now balanced following the initial rally from 2.02s to 2.70s. 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. This week’s MM posture saw decrease in shorts amidst increasing net longs and unchanged Open Interest (OI). These developments occur as MM long:short ratio and MM net long position as % of OI reach levels typically consistent with structural low formation. MM posture reached quantity needed to develop structural lows from July-September. 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.