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 1.98s failing as resistance. This probability path did play out as retracement developed early in this week’s auction to 1.95s before buyers trapped, 1.94s/1.93s, in Monday’s auction. Price discovery lower developed to key support, 1.83s, in Thursday’s trade before a failed probe lower developed to 1.81s ahead of Friday’s close, settling at 1.84s.
26-31 January 2020:
This week’s auction saw price discovery higher to 1.95s upon Sunday’s Globex re-open within last week’s key supply area, 1.94s-1.98s. Balance developed there into Monday’s trade before buyers trapped, 1.94s-1.93s. Price discovery lower developed to 1.86s as buying interest emerged, 1.88s-1.86s, into Monday’s NY close. Monday’s late buyers held the auction as price discovery higher developed to 1.92s in Tuesday’s trade. Selling interest emerged, 1.92s-1.90s, into Tuesday’s NY close.
Tuesday’s late sellers held the auction as price discovery lower developed in Wednesday’s auction to 1.85s. Buying interest emerged, 1.85s-1.86s, into Wednesday’s NY close. Narrow balance developed early in Thursday’s trade before Wednesday’s late buyers failed to hold the auction as price discovery lower continued, achieving a stopping point, 1.81s, through the EIA release (-201 bcf vs. -195 bcf expected). Sellers trapped, 1.83s-1.81s, as the market struggled to break through key support, 1.83s, into Thursday’s NY close. Thursday’s late sellers failed to hold the auction as a minor probe lower to 1.81s, failed, and price discovery higher to 1.85s developed ahead of Friday’s close, settling at 1.84s.
This week’s primary expectation of price discovery lower did develop as a minor probe lower through key support developed to 1.81s into the four-year demand cluster. Buy excess developed, halting the sell-side sequence into the week’s end.
Focus into next week remains upon market response to the key support area, 1.83s-1.81s. Buy-side failure to drive price higher from this area will target major support below, 1.60s. Alternatively, sell-side failure to drive price lower from this area will target key supply clusters above, 1.90s-1.95s/2.10s-2.30s, respectively. The highest probability path, near-term, is sell-side, barring 1.88s, failing as resistance. 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 from mid-June through September 2019 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-November (-201k contracts). This development implied that MM sentiment reached extreme bearishness as price reached lows resulting in the initial 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 unchanged (-295k contracts), as open interest (OI) declined modestly.
This week’s data shows MM net short posture unchanged (-295k contracts), as open interest (NYSE:OI) declined modestly. The MM short posture stands at -489k contracts, a new 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. This development is likely now underway, but the near-term bearish structure must be acknowledged. 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.