In this article, we examine the significant weekly order flow and market structure developments driving XLE price action.
As noted in last week’s XLE Weekly, the primary expectation for this week’s auction was for price discovery higher, provided 38.92s failed as resistance. This week’s primary expectation did not play out as last week’s late sell excess held early this week. Selling interest emerged, 38.44s/38.31s, in Tuesday’s auction as a sell-side breakdown developed through key support to 34.30s into Thursday’s auction. Sellers trapped there amidst buy excess, halting the selloff before a retracement rally developed to 36.89s ahead of Friday’s close, settling at 21.05s.
11-15 May 2020:
This week’s auction saw last week’s late sell excess, 39.25s-39s, hold as resistance as narrow balance developed, 37.92s-38.53s, into Monday’s auction. Selling interest emerged, 38.44s/38.31s, in Tuesday’s trade as price discovery lower developed into Tuesday’s close. Tuesday’s late buyers failed to hold the auction as an aggressive sell-side breakdown through key support, 36.80s, developed early in Wednesday’s trade.
The selloff continued to 35.47s where minor buy excess formed amidst buying interest, halting the selloff. Narrow balance developed, 35.47s-36.13s, as selling interest emerged into Wednesday’s close. Wednesday’s late sellers held the auction as price discovery lower continued in Thursday’s auction, achieving the weekly stopping point low, 34.30s, early in Thursday’s trade. Sellers trapped as buy excess formed, halting the selloff. A retracement rally ensued to 36.47s before selling interest emerged into Thursday’s close. Thursday’s late sellers trapped the rally continued in Friday’s trade to 36.89s near the sell-side breakdown area ahead of Friday’s close, settling at 21.05s.
This week’s auction saw last week’s sell excess hold early week before a selloff ensued to 34.30s. Sellers trapped there amidst buy excess, halting the selloff. A retracement rally then ensued to test the week’s key sell-side breakdown area. Within the larger context, the market formed a structural support, 22.88s, and now a relief rally resistance, 39.25s, in the wake of the recent historic selloff. This week’s auction was a market failure at/near the second major resistance area, 39.08s, following the historic breakdown of March 2020.
Looking ahead, the focus into next week rests on response to key resistance, 36.50s-36.90s. Buy-side failure to drive price higher from this resistance will target key demand clusters below, 35s-34.30s/31.39s-30.65s, respectively. Alternatively, sell-side failure to drive price lower from this key resistance will target key supply clusters above, 38s-39.25s/42s-44s, respectively. The highest probability path for next week is sell-side, provided 36.90s holds as resistance. The larger context now shifts neutral between 39.25s and 22.88s.
Looking under the hood of XLE, we see that its performance is really a tale of two stocks, Chevron (NYSE:CVX) and Exxon Mobil (NYSE:XOM). They account for approximately 24% and 21% of the entire ETF, respectively.
Further, their performance is responsible for -484bps and -941bps, respectively, of XLE’s current one-year performance. As go Chevron and Exxon, so goes the XLE. Chevron continues to drive the bulk of the relief rally returns.
It is worth noting that breadth, based on the S&P Energy Sector Bullish Percent Index, declined aggressively this week after trending higher in historic fashion following February-March’s historic collapse. Stocks more broadly, as viewed via the NYSE, see a similar posture. Energy’s breadth is declining and broke down through the midpoint last week, implying continued risk-off sentiment in this sector will prevail near-term. Asymmetric opportunity develops when the market exhibits extreme bullish or bearish breadth with structural confirmation. Currently, conditions favor a neutral posture as the market found structural support, 22.88s, near late 2003 support followed by a rapid and substantial relief rally to 39.08s. The market approaches major structural resistance as breadth is now once again in the bullish extreme zone. The support formed in March is likely a momentum low formed before a final price low.
The market structure, order flow, and breadth posture will 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.