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In this article, we examine the significant weekly order flow and market structure developments driving XLF price action.
As noted in last week’s XLF Weekly, the highest probability path for this week was for sell-side activity based on last week’s structural sell excess, 26.68s-26.64s. This primary expectation did not play out as the sell excess failed in Monday’s auction amidst a buy-side breakout attempt. The breakout failed, forming a new sell excess which drove price lower to 26.36s before balance development ensued through Thursday’s close.
24- 28 February 2019:
This week saw a gap higher open in Monday’s auction as last week’s sell excess was filled in amidst a buy-side breakout attempt to 26.82s. Buyers trapped, 26.76s-26.81s, before the breakout failed, and price discovery lower back into prior balance developed to 26.54s, into Monday’s close. A minor uptick developed in Tuesday’s auction to 26.68s, testing the sell excess, before balance development ensued, 26.68s-26.41s, through Wednesday’s trade.
Compression of the balance area occurred in Thursday’s auction developing a wedge structure. Buyers trapped, 26.62s-26.60s, as price discovery lower developed to 26.52s ahead of Thursday’s close, settling at 26.52s.
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This week’s auction saw a false buy-side breakout form a sell excess before price discovery lower and balance ensued. Although last week’s primary expectation did not play out, sell-side activity did occur again in this area as a false breakout and sell excess developed. The development of a structural sell excess implies the development of a stopping point high. Within the broader context, the development of a structural sell excess within key supply implies more significant resistance area may be in development.
Looking ahead, the focus into Friday’s auction and next week will center upon market response to this week’s sell excess, 26.68s-26.82s. The highest probability path into next week is for sell-side continuation toward key demand below, provided this week’s sell excess holds as resistance. Sell-side failure at this area will result in further near-term price discovery higher toward key supply overhead, 27s-27.25s. Alternatively, buy-side failure to drive price higher from here would result in potential price discovery lower to key demand, 25.80s-25.40s. The larger intermediate term bias (3-6 month) is now neutral between, 25.34s and 27.47s.
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It is worth noting that sentiment based on the S&P Financial Sector Bullish Percent Index now reflects a bounce from the levels of extreme pessimism developed late December into early January. Stocks more broadly, as viewed via the NYSE, have now also seen a bounce from a similar level. Asymmetric opportunity develops when the market exhibits extreme bullish or bearish sentiment with structural confirmation. Following the momentum low of November 2018, the market developed a stopping point low within prior key demand (and a typical seasonal low period December-January), which now serves as meaningful support. Sentiment continues moving higher toward a posture of extreme optimism. While not yet at extreme optimism, key supply, 25.90s-27.50s, will be the first area of real challenge for the buy-side and could become more structurally significant should optimism continue without price confirmation higher.
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The market structure, order flow, and sentiment 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.
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