In this article, we examine the significant weekly order flow and market structure developments driving XLK price action.
The highest probability path for this week was for price discovery higher, barring buy-side failure at key support, 82s-83s. This primary expectation did not play out as a gap lower open developed in Monday’s trade, driving price lower to 71.19s. Sellers trapped there as aggressive price discovery higher ensued to 79.21s in Monday’s trade. Balance then developed, 79.21s-70.27s, ahead of Friday’s close, settling at 71.42s.
16–20 March 2020:
This week’s auction saw a gap lower open in Monday’s auction as last week’s buy-side breakout failed. Price discovery lower developed to 71.19s where sellers trapped. Aggressive price discovery higher then ensued, achieving a stopping point, 79.21s, where sell excess halted the buy-side sequence. Rotation lower then resumed to 72.37s into Monday’s close. Buying interest emerged early in Tuesday’s trade, driving price higher to 78.44s. Sell excess emerged there, halting the buy-side sequence before selling interest emerged, 77.65s-77.35s, into Tuesday’s close.
Tuesday’s late sellers held the auction as price discovery lower resumed in Wednesday’s auction, probing Monday’s key support and achieving the weekly stopping point low, 70.27s. Buying interest emerged there amidst buy excess, halting the sell-side sequence, driving price higher to 74.92s into Wednesday’s close. Sellers trapped early in Thursday’s trade before price discovery higher developed, achieving a stopping point, 77.39s. Sell excess developed there amidst a negative delta, halting the buy-side sequence before selling interest emerged, 75.70s, into Thursday’s close. Buyers trapped, 76.85s, early in Friday’s trade, again on a negative delta as Thursday’s high held as resistance. Price discovery lower then developed to 71.41s ahead of Friday’s close, settling at 71.42s.
This week’s auction saw last week’s breakout higher fail early week before sell-side continuation developed to 70.27s. Within the larger context, price discovery lower continues within the bearish bias following the breakdown below January support, 94.71s.
Looking ahead, the focus into next week’s auction will center upon response to this week’s key support, 70.27s-72s. Buy-side failure at this key support would target key support below, 57.40s. Alternatively, sell-side failure to drive price lower from this key area would target key supply above, 75s-77.39s/82s-84.38s, respectively. From a structural perspective, the highest probability path near-term remains sell-side barring failure of 77.34s as resistance. Within this near-term context, the intermediate term (3-6 month) bias is bearish barring failure of 94.71s as resistance.
When looking under the hood of XLK, the performance of the ETF hinges largely upon the behavior of two stocks, Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL). Together, they have accounted for 1276 and 1388 basis points of XLK’s return since the January 2019 low, respectively. Weakness in these shares will likely have a significant effect on XLK’s price action.
It is worth noting that breadth based on the S&P Technology Sector Bullish Percent Index saw a historic collapse in breadth from February into March. Stocks more broadly, as viewed via the NYSE, saw similar behavior. Asymmetric opportunity develops when the market exhibits extreme bullish or bearish breadth with structural confirmation. Market structure is bearish while breadth is now becoming bullish. While market structure and breadth diverge, caution is warranted before any buying location may develop.
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.