In this article, we examine the significant weekly order flow and market structure developments driving XLK‘s price action.
The highest probability path for this week was for price discovery higher, barring buy-side failure at key support, 98.83s. This primary expectation did play out as a test of this key support occurred in Monday’s auction where buy excess formed. Price discovery higher then ensued through the remainder of the week to 102.13s ahead of Friday’s close, settling at 101.96s.
10-14 February 2020:
This week’s auction saw initial price discovery lower in Monday’s trade, achieving the weekly stopping point low, 99.09s, near key support. Structural buy excess developed there, driving price higher to 101.06s, where buying interest emerged into Monday’s close. Monday’s late buyers held the auction as a gap higher open formed in Tuesday’s trade before buy-side continuation developed, achieving a stopping point, 101.90s. Buyers trapped there, driving price lower in a pullback to 100.39s into Tuesday’s close.
The pullback low held as rotation higher resumed in Wednesday’s trade to 101.83s, testing Tuesday’s high. Buyers trapped there into Wednesday’s close. Once again, Wednesday’s late buyers failed to hold the auction, driving price initially lower in Thursday’s trade to 100.84s. Buy excess developed there before buy-side continuation resumed, achieving a stopping point, 102.05s. A minor pullback then developed to 101.40s where buying interest emerged into Thursday’s close. Thursday’s late buyers held the auction as minor buy-side continuation developed early in Friday’s auction, achieving the weekly stopping point high, 102.13s. Minor sell excess formed there, halting the buy-side sequence before balance developed, 102.13s-101.43s, ahead of Friday’s close, settling 101.96s.
This week’s auction saw a key support hold early week on a re-test before price discovery higher continued to 102.13s, new, all-time highs. Within the larger context, price discovery higher continues within the bullish bias following the breakout of October 2019.
Looking ahead, the focus into next week’s auction will center upon response to this week’s key resistance, 102.13s. Sell-side failure to drive price lower from this key area would target new all-time highs. Alternatively, buy-side failure at this key supply would target key demand clusters below, 96s-94.72s/92s-90.70s, respectively. From a structural perspective, the highest probability path near-term remains buy-side barring buy-side failure at key support, 99.08s. Within this near-term context, the intermediate-term (3-6 month) bias is bullish barring buy-side failure at 94.71s.
It is worth noting that breadth based on the S&P Technology Sector Bullish Percent Index has seen consolidation following the move into extreme bullish breadth in January 2020. Stocks more broadly, as viewed via the NYSE, are now exhibiting a similar consolidation develop below extreme bullish readings. Asymmetric opportunity develops when the market exhibits extreme bullish or bearish breadth with structural confirmation. Market structure and breadth are neutral. While breadth and market structure do not confirm price highs, this development implies buy-side caution is warranted as the current buy-side sequence begun last October 2019 is likely becoming extended.
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 1,276 and 1,388 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.
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.