WTI Weekly: Pullback Early Week Toward Key Support Before Rally Phase Ensued Toward April's Key Breakdown Area

Summary

• Price discovery lower through key support in Monday’s trade to 10.07s into Tuesday’s auction.
• Buying interest emerged, halting the pullback, before price discovery higher developed to 20.48s into week’s end.
• The near-term bias is buy-side, barring failure of 16.53s as support.
• This week’s leveraged capital posture saw meaningful increase in net length as the upward trend continues.

In this article, we examine the significant weekly order flow and market structure developments driving WTI price action.

As noted in last week’s WTI Weekly, the primary expectation for this week was for price discovery lower, barring failure of 15.64s as support. This expectation played out early week as the key support area, 15.64s, failed in Monday’s auction as a sell-side breakdown ensued. The correction continued to 10.16s near major support (and Sharedata’s average weekly range low target) before buying interest emerged, halting the pullback. A rally then ensued to 20.48s ahead of Friday’s close, settling at 19.78s.

26 April-01 May 2020

This week’s auction saw price discovery lower in Monday’s auction as key support, 15.64s, failed. The correction continued, achieving a stopping point, 11.88s, near Sharedata’s Average Weekly Range Low Target. Balance developed, 11.88s-13.97s, into Monday’s close. The pullback continued early in Tuesday’s trade, achieving the weekly stopping point low, 10.07s, near the major structural buy excess, 6.50s-9.00s, formed 21-22 April. The pullback halted there as rotation higher ensued before buying interest emerged, 12.30s, into Tuesday’s NY close.

Tuesday’s late buyers held the auction, as the rally continued back through prior key support, achieving a stopping point, 16.78s, into the EIA release (+8.9 million vs. +10.1 million expected) ahead of Wednesday’s NY close. Wednesday’s buyers at 15.51s held the auction as the rally through key resistance, 18s-18.30s, continued to 19.44s as buying interest emerged into Thursday’s NY close. Thursday’s late buyers held the auction as the rally continued early into Friday’s auction, achieving the weekly stopping point high, 20.48s. Sell excess developed there, halting the rally phase before a pullback ensued to 18.07s as balance developed, 18.07s-20.35s, ahead of Friday’s close, settling at 19.78s.

This week’s primary expectation was for price discovery higher, provided 15.64s held as support. This probability path played out only after key support failed early week, driving price lower to major support. A rally then ensued from there to 20.48s into week’s end. While the market traded lower early week, it did so in retracement to a major support area, 6.50s-10s, which could be identified via market structure (the buy excess formed 21-22 April from 6.50s-9s) and the option wall developed at the $10 strike. There was substantial evidence to support the premise that any correction toward $10 would likely encounter support in that area. This did occur and upon the revisit of the 15s, it is likely that dealer futures buying increased as delta/gamma hedging occurred further facilitating the rally back toward the major breakdown area (and current key upside option wall), 20s. This week’s rotation (1,041 ticks) traded beyond the weekly 1^st standard deviation expectancy (960 ticks).

Source: CME/QuikStrike

As noted in recent weeks, the selloff to 20.52s five weeks ago was likely a momentum extreme (both in amplitude and volume). Price extremes generally follow momentum extremes. The subsequent historic collapse to 6.50s is likely to serve as that price extreme. The large buy excess, 6.50s-9s, formed 21-22 April is structural indication of a halting of the prior sell-side sequence. Focus into next week centers on response to this week’s key cluster, 18.06s-20.48s. Sell-side failure to drive price lower from this key resistance area will target key supply clusters overhead, 21s-22.58s/25.27s-29.13s, respectively. Alternatively, buy-side failure at key resistance area will target key demand cluster below, 12s-10.26s/8s-6.50s, respectively. The near-term bias is buy-side, barring failure of 16.51s as support.

It is worth noting that market posture warranted caution on the sell-side near the January 2019 low, 42.50s, as Managed Money (MM) long posture bottomed there. Similarly, in October 2019, market posture reached similar levels. In both cases, the market saw meaningful rallies. Recent week’s positioning into the current low has exhibited similar behavior. This week’s report shows MM net long posture (+283k contracts), a meaningful increase from last week as MM short posture decreased (-63k contracts) substantially as well. The current upward trend of MM net long posture is a bullish underpinning to the market.

Friday, 01 May, marked the beginning of the next contract roll period for the oil ETF, USO. While last month’s contract roll period created substantial dislocation in WTI pricing, it is important to remember that this was largely a function of the USO’s monthly position roll. Following the historic negative pricing associated with last month’s roll, USO has adjusted its portfolio process to disperse holdings out along the futures curve rather than concentrating positioning in the front month futures contract. As a result, USO currently holds no June contracts while holding 126k contracts along the curve, representing approximately 36% of all MM long contracts. While USO holds a large percentage of MM length, it is unlikely similar pricing dislocation will develop into the June’s contract roll into mid-May.

Source: USCF Investments

MM long:short ratio, MM net long as % of open interest, and MM net long posture have all trended higher from levels of historical extreme pessimism. This development continues as WTI now trades off the major support area in the typically bullish season (January-May). While the market sell-off has been aggressive and historic in duration and amplitude, it is likely the price action of recent weeks is part of the development of a major support area.

The market structure, order flow, and leveraged capital posture provide the empirical evidence needed to observe where asymmetric opportunity resides.

Analyst’s 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.