NG Weekly: Pullback To Key Support Early Week Before Minor Probe Higher To 2.02s

Summary

• A pullback to 1.76s developed in Monday’s auction where an aggressive buy response drove price higher to 2.02s into Tuesday’s auction.
• Sell excess developed there as balance developed, 2.02s-1.83s, into the week’s end.
• The highest probability path, near-term, is sell-side, barring failure of 2.02s as resistance.
• This week’s leveraged capital posture saw continued increase in net length.

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 sell-side, barring failure of 1.98s as support. This probability path did not play out as an early week pullback to last week’s key support saw a buy response in Monday’s auction. Rotation higher developed to 2.02s in Tuesday’s auction, testing key resistance. Sell excess developed there, halting the rally as balance developed, 2.02s-1.83s, into Friday’s auction, settling at 1.89s.

26 April–01 May 2020:

This week’s auction saw a pullback develop in Monday’s trade as last Friday’s late buyers failed to hold the auction. Price discovery lower developed, achieving the weekly stopping point low, 1.76s, as last week’s key support was tested. An aggressive buy response developed there, driving price higher to 1.90s as buying interest emerged into Monday’s NY close. Monday’s late buyers held the auction as balance developed, 1.94s-1.88s, early in Tuesday’s auction. A buy-side breakout attempt then developed in Tuesday’s trade, achieving the weekly stopping point high, 2.02s. Sell excess developed there, halting the rally as rotation lower to 1.93s developed into Tuesday’s NY close.

Narrow balance developed, 1.93s-1.97s, early in Wednesday’s auction before rotation lower continued to 1.85s as buying interest emerged into Wednesday’s NY close. Wednesday’s late buyers failed to hold the auction as price discovery lower continued early in Thursday’s auction, achieving a stopping point, 1.82s. Buy excess formed there, halting the sell-side sequence as rotation higher resumed through the EIA release (+70 bcf vs. +69 bcf expected) to 1.95s where selling interest emerged into Thursday’s NY close. Thursday’s late sellers failed to hold the auction as a re-test of Tuesday’s high developed early in Friday’s auction at 2.01s. Sell excess developed there again before a selloff developed to 1.87s ahead of Friday’s close, settling at 1.89s.

This week’s primary expectation of price discovery lower did not unfold as key support, 1.76s, held early week before re-tests of key resistance developed on Tuesday and Friday. The rally phase stalled within key supply overhead and a large option “Wall”, 2.00s.

Source: CME/QuikStrike

Focus into next week rests upon the market response to the key trade cluster, 1.82s-2.02s. Buy-side failure to drive price higher from this area will target key demand clusters below, 1.73s-1.66s/1.60s-1.55s, respectively. Alternatively, sell-side failure to drive price lower from this area will target key supply clusters above, 2.17s-2.22s/2.23s-2.29s, respectively. The highest probability path, near-term, is sell-side, barring failure of 2.02s 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 reflect signs of potential structural low formation as the market trades to this major demand area.

It is worth noting that despite the approximately 59% decline from the November 2018 high to the August 2019 low, 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-November (-201k contracts). This development implied that MM sentiment reached extreme bearishness as price reached lows, resulting in the rally from 2.02s to 2.90s. 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 data shows MM net posture remained positive (15k contracts), an approximately 345k contract shift, from the fourteen-year low developed on 11 February. This week’s MM net posture is the first positive reading since May 2019.

The MM short posture stands at -178k contracts as the trend lower from the 04 February high (-505k contracts) stalls.

The MM long:short ratio and MM net long position as % of open interest remain at levels typically consistent with structural low formation. MM posture reached quantity needed to develop structural lows from July-September 2019 and recent levels were more extreme. MM posture is now reflecting the material shift of net posture at/near major lows. This type of development warrants caution on the sell-side as this type of herding behavior generally creates potential for abrupt price movement in the opposite direction. The market has seen such movement of the 1.55 support recently. Based on the market generated data, it is likely a structural low has developed.

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.