In this article, we examine the significant weekly order flow and market structure developments driving XLF price action.
The highest probability path for this week was for price discovery lower, provided 22.52s held as resistance. This primary expectation did play out as last week’s late buyers failed to hold the auction as a pullback ensued to 21.21s near key support into Tuesday’s auction. Buying interest emerged there as balance developed, 21.21s-21.86s, through mid-week before buying interest emerged again near key support ahead Friday’s close, settling at 21.74s.
19-24 April 2020:
This week’s auction saw the pullback begin in Monday’s trade as last week’s late buyers failed to hold the auction. Buyers trapped, 22.32s, upon retracement before price discovery lower developed to 21.75s as buying interest emerged into Monday’s close. Monday’s late buyers failed to hold the auction as a gap lower open formed in Tuesday’s trade before the pullback continued, achieving the weekly stopping point low, 21.21s, near key support. Buy excess formed there before buying interest emerged, 21.28s-21.36s, into Tuesday’s close.
Tuesday’s late buyers held the auction as rotation higher developed to 21.79s as balance ensued, 21.79s-21.47s, before selling interest emerged, 21.51s-21.61s, into Wednesday’s close. Wednesday’s late sellers initially failed to hold the auction as minor price discovery higher developed to 21.86s in Thursday’s auction. Buyers trapped there amidst sell excess as balance continued, 21.86s-21.33s, into Friday’s close, settling at 21.74s.
This week’s auction saw primary sell-side expectation unfold as a pullback developed to 21.21s near key support in Tuesday’s auction. Buying interest emerged there as balance developed, 21.21s-21.86s, above key support through mid-week into the week’s end.
Looking ahead, the focus into next week’s auction will center upon market response to the current balance area, 21.86s-21.21s. Sell-side failure at this area will target key supply above, 23.14s-23.66s/25.98s-28.25s, respectively. Alternatively, buy-side failure at this area will target the key demand clusters below, 20.14s-19.36s/18.05s-17.50s, respectively. The highest probability path near-term based on market structure is for price discovery higher, barring failure of 21.21s as support. With the failure of 29.75s as support, the larger intermediate term bias (3-6 month) remains sell-side barring failure of 23.66s as resistance.
Looking under the hood of XLF, we see that Berkshire (NYSE:BRK.A) (NYSE:BRK.B) and JPMorgan (NYSE:JPM) represent approximately 27% of the XLF. They have contributed -160bps and -234bps of the last year’s activity, respectively.
These companies are the largest weighted holdings in XLF, and their response will remain key.
It is worth noting that breadth, based on the S&P Financial Sector Bullish Percent Index, saw continued decline following the remarkable rise in bullish breadth following the development of the current structural low, 17.50s. Stocks more broadly, as viewed via the NYSE, have also seen similar behavior. Asymmetric opportunity develops when the market exhibits extreme bullish or bearish breadth with structural confirmation. Caution remains warranted as some time is likely needed for lower prices to find acceptance before structural support can develop. It is also worth noting that historically, the largest rallies tend to be within the context of bear markets.
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.