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 lower barring failure of 1.90s as resistance. This probability path did play out as a sell-side breakdown through key support, 1.80s, developed early week to 1.75s. Buying interest emerged near the low before driving price higher to 1.87s where buyers trapped in Thursday’s auction, developing balance ahead of Friday’s close, settling at 1.83s.
09-14 February 2020:
This week’s auction saw a gap lower open in Sunday’s Globex trade as last Friday’s late sellers held the auction. Key support, 1.80s, was breached as price discovery lower developed in Monday’s trade, achieving a stopping point, 1.75s, into Monday’s NY close. Large buying interest emerged, 1.79s-1.75s, during the sell-side sequence. Narrow balance developed, 1.78s-1.76s, early into Tuesday’s auction before a minor probe lower developed, achieving the weekly stopping point low, 1.75s. Minor buy excess developed there, halting the sell-side sequence before price discovery higher developed, as buying interest emerged, 1.76s-1.79s, into Tuesday’s NY close.
Tuesday’s buyers held the auction as price discovery higher continued in Wednesday’s trade, achieving a stopping point, 1.85s, as the sell-side breakdown below 1.80s failed. Balance developed, 1.85s-1.82s, into Thursday’s trade before a failed buy-side breakout developed through the EIA release (-115 bcf vs. -110 bcf expected), achieving the weekly stopping point high, 1.87s. Structural sell excess developed there as buyers trapped, driving price back below Wednesday’s resistance to 1.82s into Thursday’s NY close where buying interest emerged, 1.83s-1.82s. Thursday’s late buyers failed to hold the auction as the pullback continued early in Friday’s trade, achieving a stopping point, 1.79s. Sellers trapped there, driving price higher to 1.85s as balance trade developed, 1.85s-1.83s, ahead of Friday’s close, settling at 1.83s.
This week’s primary expectation of price discovery lower did develop as a sell-side breakdown through key support, 1.80s, developed to 1.75s into the four-year demand cluster. Buying interest emerged there, driving price higher to 1.87s as the sell-side breakdown failed. Balance then developed, 1.87s-1.79s, into the week’s end.
Focus into next week rests upon the market response to key supply, 1.85s-1.90s. Sell-side failure to drive price lower from this area will target key supply clusters above, 1.91s-1.98s/2.10s-2.17s, respectively. Alternatively, buy-side failure to drive price higher from this area will target the key demand cluster/major support below, 1.80s-1.75s/1.60s, respectively. The highest probability path, near-term, shifts buy-side, barring failure of 1.75s as support. The failure of 2.15s as support remains structurally significant. 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. While the sell-side bias remains, trade is becoming constricted following the approximately 38% decline from the November 2019 high, warranting caution on the sell-side.
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 short posture increase (-330k contracts), a fourteen-year low as open interest (OI) decreased modestly.
The MM short posture stands at -494k contracts, a minor decline from the fourteen-year high. 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 current levels are more extreme. This development is likely now underway, and this week’s support may have larger structural implications. MM posture is now reflecting extreme pessimism with leveraged capital materially increasing short exposure 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 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.