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WTI Weekly: Mind The Gap - How Market Structure And Order Flow Can Confirm Directional Potential

06/20/19 04:21:44 PM
by Taylor Ireland

In this article, we examine the order flow and limit order book data in the WTI futures market that provides insight into the sell-side price discovery and development of support for Wednesday, June 12, 2019's auction. Market structure and order flow provide insight into the actual transactional activity of a dual-auction's price discovery process. Analysis of this data provides real-time insight into the actions of market participants, providing a dynamic dataset to inform one's risk management process.

Security:   WTI
Position:   N/A

June 12, 2019:

The structural framework provided in Sharedata's Daily Dashboard for Tuesday, June 11's auction was for price discovery lower. Our daily statistical support targets were: 51.77s/51.13s/50.48s. Qualitatively, these levels had held as supports 34%, 21%, and 4% (respectively) of recent market auctions based on the market generated data. This data provided a sell-side framework with a probable support "zone" between 51.77s-50.48s. This type of daily framework, while useful, is made more effective when using live order flow and structural analysis to confirm or negate the most probable daily inference.

Figure 1. WTI Daily Dashboard June 11, 2019.
Graphic provided by: Sharedata Futures, Inc..
Heading into Wednesday's auction, the market developed a structural sell spike, 53.40s-52.94s, evidenced in the market profile structure. Spikes function similarly to another "single print" structure, the tail, but differ in that they are unresolved. In this case, a sell spike (or imbalance) developed into Tuesday's NY close, implying potential for price discovery lower into Wednesday's auction, provided the spike area held as resistance.

Price discovery lower continued as Tuesday's API inventory data was released, ultimately driving price lower to 51.46s toward Sharedata's average daily range low target into Wednesday's London auction before a buy excess (or tail) emerged, halting the sell-side sequence temporarily. A minor relief rally developed into Wednesday's NY open toward 52.20s. Market structure was providing two important structural indications: 1) Tuesday's sell spike had held as resistance, 2) a gap lower open had developed into Wednesday's NY auction. Despite being ahead of the EIA inventory release, market structure was indicating potential for further price discovery lower.

Large buying interest trapped early in the NY auction before a sell excess (tail) developed at 52.40s upon the release of the EIA data (+2.2mil v -400k expected). Price discovery lower developed from there as balance ensued through the London close. Large buying interest emerged into the London close failing to hold the auction as sell-side continuation resumed into Wednesday's NY close to 51.07s at/near Sharedata's 1st standard deviation low target. Ultimately, a flush of the limit order book developed after the NY close to 50.71s where sellers trapped, halting the sell-side sequence within the "support zone".

Figure 2. WTI Auction June 12, 2019.
Graphic provided by: NinjaTrader.
The practice of analyzing market structure developments is best accomplished with the use of order flow and limit order book (LOB) analysis. In short, plotting the buy and sell transactions of significance (in this case volume equal to or greater than 150 contracts) as well as the resting limit bids and offers (equal to or greater than 75 contracts) allows us to see both the actions and intent of larger participants (who significantly affect price).

In this week's analysis, the key market structure development was that of a gap lower open. As documented in our Market Profile Database, gap lower opens in WTI provide asymmetric potential for price discovery lower based on a 5-year dataset. Further statistical analysis of such events reveals an average range expectancy for the NY auction of 144 ticks. In this case, the NY auction was 133 ticks, consistent with statistical norm.

Figure 3. Market Profile Dashboard.
Graphic provided by: Sharedata Futures, Inc..
Market structure and its statistical analysis provided indication of asymmetric potential for lower prices. Real-time order flow analysis provided confirmation, in this case, of this inference. Market structure provided the directional context (sell-side based on Tuesday's sell spike and Wednesday's gap lower open). The order flow and limit order book data confirmed the sell-side development of the directional context provided by the market structure. The daily framework identified statistical support targets and their qualitative potential to hold as support. This confluence of structural, statistical, and order flow data provided insight into the auction's outcome based not on lagging price indicators but rather structural formation and the transactional behavior and intent of significant quantity to drive price discovery.

Taylor Ireland

Sharedata Futures, Inc. provides historical data mining and visualization for the benchmark NYMEX Energy Futures Markets.

Sharedata combines structural analysis of the market generated data, dynamic systems analysis, and Bayesian causal inference techniques favored by the scientific and intelligence communities to provide a robust framework for addressing the uncertainty and risk in energy pricing.

Title: Founder
Company: Sharedata Futures, Inc.
Dallas, TX
E-mail address:

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