Wednesday, January 30, 2013

Pre-Market Global Review - 1/30/13 - FOMC Day

This newsletter provides free market direction trading insights that are derived from our seasoned and unique, inter-market analysis.  We hope that this information will provide both the novice and seasoned trader with valuable assistance.  Our approach is to harvest clues clues from the Market's “tea leaves” as to what the market is doing or is likely to do.  

January 30, 2013
Good Morning Traders,
As of this writing 4:40 AM EST, here’s what we see:
US Dollar –Down at 79.565 The US Dollar is down 59 ticks and is trading at 79.565.  
Energies – March Oil is up at 97.62.
Financials – The 30 year bond is down 22 ticks and is trading at 142.24.
Indices – The March S&P 500 emini ES contract is up at 1506.00 even and is up 4 ticks.
Gold – The February gold contract is trading up at 1665.00 even and is up 40 ticks.

Finally a correlated market to the upside.  The dollar is down- and oil is up+  which is normal and the 30 year bond is trading down which correlates with the US dollar trading down.  The Financials should always correlate with the US dollar such that if the dollar is lower then bonds should follow and vice versa.   The indices are up fractionally with the US dollar trading lower.  Gold is trading up which correlates with the US dollar trading lower.   I tend to believe that Gold has an inverse relationship with the US Dollar as when the US Dollar is down, Gold tends to rise in value and vice-versa. Think of it as a seesaw, when one is up the other should be down.   I point this out to you to make you aware that when we don't have a correlated market, it means something is wrong.  As traders you need to be aware of this and proceed with your eyes wide open. 

All of Asia closing higher.   As of this writing all of Europe is trading fractionally higher. 

  Possible challenges to traders today is the following:

-  ADP Non-Farm Employment Change is out at 8:15 AM EST.  This is major. 
-  Advance GDP is out at 8:30 AM EST.  This is major.
-  Advance GDP Price Index is out at 8:30 AM EST.  This is major.
-  Crude Oil Inventories are out at 10:30 AM EST.  This will move the crude market.
-  FOMC Statement is out at 2:15 PM EST.  This is major.
-  Federal Funds Rate is out at 2:15 PM EST.  This is major.

Yesterday we said that our bias was toward the long side with the net result being that the Dow closed 72 points higher.  It only goes to show you that anything can happen in a volatile market.  Today market correlation is calling for a higher open and our bias is toward the long side.   However today is FOMC Day.  I personally don't trade on FOMC Day because history has taught me that the markets do not act with any semblance of normalcy.  Currently the markets are pointed toward a higher open with Asia closing higher and Europe currently trading higher.  Could this change?  Of course.   Remember anything can happen in a volatile market.

Yesterday we had the S&P HPI number that came in exactly according to projections.  But the Consumer Confidence number did not which caused the markets to falloff before regaining strength to close higher.  One of the advantages of market correlation is that it gives you insight as to what the fundamentals of the markets are.  Markets over the course of a trading day do not usually deviate from fundamentals unless something dramatically happens during the course of a trading day.  Today we have the FOMC reporting and as we reported on Monday, we do not see any change in the Federal Funds Rate.  Special attention will be paid to the wording of the statement as analysts will be dissecting the statement to see if there are any implied changes forthcoming.  I believe that Ben Bernanke and most members of the FOMC know that this recovery is fragile at best and they are not going to do anything to upset it at this time.  They know that despite the fact that the FFR is at an all time low, credit is not easily available to many Americans.  Has anyone tried to refinance a mortgage lately?  It isn't as easy as it was a few short years ago.  Banks will no longer accept "as stated" income for major purchases such as a re-fi.  This despite the fact that the banks can borrow capital from the Federal Reserve at 0.25%.  Chairman Bernanke being a wise student of history, knew at the beginning of the Financial meltdown in 2008 that the one aspect that must be kept going is the flow of capital (aka credit).  He learned that lesson by studying the causes of the Great Depression and decided that it wasn't going to happen under his watch. 

On the political front it appears as though its "all quiet on the western front" as nothing new has occurred.  Our understanding is that the GOP has gone to a retreat in North Carolina this weekend to discuss what their stance will be going forward.  It would seem to me that moderate Republicans (aka the adults in the room) have realized that this Tea Party thing isn't working out too well.  The American people clearly don't want a government that is held hostage.  Last week the GOP dominated House of Representatives passed a measure to extend the debt ceiling for 90 days.  It now has to go to the Democratic controlled Senate and the President for approval.  Between them I don't think it has a chance for passage but the Smart Money is loving it.  They just got a 3 month reprieve from this issue but don't worry, once they realize the measure won't pass that will change.  If you're wondering what this has to do with markets; I would say to you everything.  Look at what happened during the recent fiscal cliff crisis.  If you're wondering why we haven't had correlated markets since the election, look no further.  The markets do not like uncertainty when it comes to fiscal issues and anything that reeks of uncertainty is not viewed in a positive light.  Will the markets survive? of course.  But I suspect that the GOP wants to extend for the very purpose of keeping uncertainty and therefore fear alive.  They know the markets are fickle and the longer the issue remains alive the more uncertainty will be created.

As readers are probably aware I don't trade equities.   While we're on this discussion, let's define what is meant by a good earnings report.  A company must exceed their prior quarter's earnings per share and must provide excellent forward guidance.  Any falloff between earning per share or forward guidance will not bode well for the company's shares.  This is one of the reasons I don't trade equities but prefer futures.  There is no earnings reports with futures and we don't have to be concerned about lawsuits, scandals, malfeasance, etc.

Anytime the market isn't correlated it's giving you a clue that something isn't right and you should proceed with caution..    Today market correlation is calling for a lower open however our bias is towards the long side.  Could this change?  Of course.  We could have a Home Price Index number that could in fact drive the markets higher or lower.  In a volatile market anything can happen.  We'll have to monitor and see.  For awhile now we've promised a video on how a trader can use Market Correlation in tandem with their daily trading.  A good friend of Market Tea Leaves: Carl Weiss of Sceeto and I produced a video on December 22nd that shows this.  Here it is:

Please note the video is about a half hour in length and we plan on producing more in the near future.  Also note that in the near future we will have other videos where we will interview various trading leaders.

As I write this the crude markets are trading higher and the US Dollar is declining.  This is  normal.  Think of it this way.  If the stock market is trading lower, it's safe to assume that the crude market will follow suit and vice versa.  Crude trades with the expectation that business activity is expanding.  The barometer of which is the equities or stock market.  If you view both the crude and index futures side by side you will notice this. Yesterday crude almost hit the 98.00 a barrel mark.   So it would seem that at the present time crude's support is at 92.00 with resistance at 98.00 a barrel.  This could change.  All we need do is look at what happened last fall when crude was trading over $100.00 a barrel. We'll have to monitor and see.  Remember that crude is the only commodity that is reflected immediately at the gas pump. 

Future Challenges:

 - Sequester spending cuts to commence around early March
 - Debt Ceiling also around the early March time frame.

Crude oil is trading higher and the US Dollar is declining.  This is normal.  Crude typically makes 3 major moves (long or short) during the course of any trading day: around 7 AM EST, 9 AM EST and 2 PM EST when the crude market closes.  If crude makes major moves around those time frames, then this would suggest normal trending, if not it would suggest that something is not quite right.  If you feel compelled to trade, consider doing so after 10;30 AM EST when the inventory numbers  released and the markets give us better direction.  Another time today is after 2:15 after the FOMC Statement.  As always watch and monitor your order flow as anything can happen in this market.  This is why monitoring order flow in today's market is crucial.  We as traders are faced with numerous challenges that we didn't have a few short years ago.  High Frequency Trading is one of them.   I'm not an advocate of scalping however in a market as volatile as this scalping is an alternative to trend trading. 
Remember that without knowledge of order flow we as traders are risking our hard earned capital and the Smart Money will have no issue taking it from us.  Regardless of whatever platform you use for trading purposes you need to make sure it's monitoring order flow.  Sceeto does an excellent job at this.  To fully capitalize on this newsletter it is important that the reader understand how the various market correlate.  More on this in subsequent blogs.

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