WTI Weekly: Failed Breakdown Early Week Before An Aggressive Rally Ensued To 28.56s
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 25.24s as support. This expectation did not play out as a failed sell-side breakdown developed through key support to 19.28s in Monday’s auction. Balance then developed, 22s-19.90s, through mid-week before buying interest emerged, driving price higher through key resistance to 28.56s where sell excess formed, halting the rally ahead of Friday’s close, settling at 28.34s.
29 March-03 April 2020
This week’s auction saw a sell-side breakdown attempt in Monday’s auction through major structural support, 20s. Price discovery lower developed achieving the weekly stopping point low, 19.28s. Selling interest emerged, 19.92s/19.83s, before buying interest emerged, 19.47s, into Monday’s NY close. Monday’s late buyers held the auction as price traded back above prior key support, 20s, as buyers trapped, 21.78s/21.54s. A pullback developed to 20.05s into Tuesday’s NY close.
Narrow balance developed, 20.05s-20.95s, through Wednesday’s trade and the EIA release (+13.8 million vs. +3.9 million expected) before buying interest emerged, 20.28s/20.50s, into Wednesday’s NY close. Wednesday’s late buyers held the auction, driving price higher in Thursday’s auction as buying interest emerged, 21.73s, near key resistance, 22s. Price discovery higher continued to 22.60s as buying interest emerged. Newswires then reported that discussions between POTUS, MBS of Saudi Arabia, and Russia had occurred regarding production cuts of 10-15mbd (depending on the source). An aggressive rally ensued, achieving a stopping point, 27.39s, where sell excess emerged, 27.39s-26.20s, halting the buy-side sequence. Retracement developed to 23.52s where buy excess developed, halting the sell-side sequence ahead of Thursday’s NY close. Balance developed, 23.52s-25.13s, early into Friday’s auction before buy-side continuation resumed, achieving the weekly stopping point high, 28.56s. Buyers trapped amidst sell excess, halting the rally before retracement developed to 26.28s ahead of Friday’s close, settling at 28.34s.
This week’s primary expectation was for price discovery lower, provided 25.24s held as resistance. This probability path did not play out as a failed breakdown through key support, 20s, developed early week before a rally phase developed to 28.56s. This week’s rotation (928 ticks) traded just shy of the weekly 2nd standard deviation range expectancy (1000 ticks).
As noted in recent weeks, the selloff to 20.52s two weeks ago was likely a momentum extreme (both in amplitude and volume). Price extremes generally follow momentum extremes. This week’s failed breakdown to 19.28s may serve as that price extreme. It is worth noting that a “Put Wall” has persisted at the 20 strike as well as the 25 strike, ultimately resulting in further adjustment higher toward the next option wall area above, 29s-30s.
Looking ahead, the primary expectation into next week is that the bulk of risk associated with coronavirus/Russia-Saudi price war is priced in. Focus into next week centers on response to key resistance, 28s-28.56s. Sell-side failure to drive price lower from this key resistance area will target key supply clusters overhead, 28.42s-30.73s/32s-34.18s, respectively. Alternatively, buy-side failure at key resistance will target key demand clusters below, 24.20s-23s/21s-20s, respectively. The near-term bias is now buy-side barring failure of 22s as support. The broader contextual question is: has development of a new, structural support area near twenty-year lows begun?
It is worth noting that market posture warranted caution on the buy-side near the April 2019 high, 66.60s, as Managed Money (MM) long posture peaked there. Similarly, from mid-December 2019 to mid-January 2020, market posture reached similar levels to April 2019 as price traded toward 64s. In both cases, the market saw meaningful corrections. This week’s report shows MM net long posture (+126k contracts), a minor increase from last week as MM short posture also increased (-108k contracts). Within the last five years, for a structural low to developed, MM short posture has had to exceed 100k contracts in confluence with sub-100k MM net long posture. MM long:short ratio, MM net long as % of open interest, and MM net long posture are all at 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, this occurred as price traded to twenty-year lows and the near-term option “put wall” at the 20 strike. Due to the continued aggressive price movement and dramatic increase in volatility premiums across markets, the response in the coming weeks at this major support will be very significant in the longer term.
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.