Friday, February 1, 2013

Pre-Market Global Review - 2/1/13 - Jobs Friday


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.  

February 1, 2013
Good Morning Traders,
As of this writing 5:01 AM EST, here’s what we see:
US Dollar –Down at 78.995 The US Dollar is down 231 ticks and is trading at 78.995.  
Energies – March Oil is down at 97.26.
Financials – The 30 year bond is down 10 ticks and is trading at 143.05.
Indices – The March S&P 500 emini ES contract is up at 1499.00 even and is up 21 ticks.
Gold – The February gold contract is trading up at 1664.20 and is up 36 ticks.

This is not a correlated market.  The dollar is down- and oil is down-  which is not 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 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. 

With the exception of the Nikkei and Shanghai indices the rest of Asia closing lower.   As of this writing all of Europe is trading higher. 

  Possible challenges to traders today is the following:

-  Non-Farm Employment Rate is out at 8:30 AM EST.  This is major. 
-  Unemployment Rate is out at 8:30 AM EST.  This is major.
-  Average Hourly Earnings is out at 8:30 AM EST.  This is not major.
-  FOMC Member Dudley speaks at 8:30 AM EST.  This is major.
-  Final Manufacturing PMI is out at 9 AM EST.  This is not major.
-  Revised UOM Consumer Sentiment is out at 9:55 AM EST.  This is not major.
-  Revised UOM Consumer Inflation Expectations are out at 9:55 AM EST.  This is not major.
-  ISM Manufacturing PMI is out at 10 AM EST.  This is major.
-  Construction Spending is out at 10 AM EST.  This is major.
-  ISM Manufacturing Prices are out at 10 AM EST.  This is not major.
-  Total Vehicle Sales - All Day.  This is major.

Yesterday we said our bias was toward the short side with the net result being that the Dow closed 49 points lower.  It only goes to show you that anything can happen in a volatile market.  Today market correlation is calling for a lower open however our bias is toward the long side.   Here's why.  With the exception of the Nikkei and Shanghai (which closed fractionally higher), the rest of Asia closed much lower.  As of this writing all of Europe is trading higher.  The missing ingredient is crude.  If crude were trading higher I would say this is completely correlated market.  Much of this will hinge on the Jobs Report at 8:30 AM EST.  Bottom line, this is an uncorrelated market.   Could this change?  Of course.   Remember anything can happen in a volatile market.

Yesterday Unemployment Claims came in with 38,000 more claims than the week prior.  This set the tone for the trading day and although the market fluctuated between positive and negative territory, at the end of the day it closed lower.  Hmm, must be something to this market correlation stuff.  The great thing about market correlation is that it gives you a clue as to what to look forward to.  Today we have the monthly Jobs Report aka Jobs Friday.  I personally don't trade on Jobs Friday as history has taught me that the markets don't act with any semblance of normalcy.    Today we have 10 economic reports, all within a short period of time and 6 of which are considered major.  If that isn't enough to keep a smart trader out of the market, I don't know what will.

On the political front it appears as though the Democratic controlled Senate has decided to pass the debt ceiling extension that the GOP dominated House of Representatives passed last week.  It now has to go to the President for passage.  The caveat here is that Congress must approve a blueprint for the budget by April 15th or they will forfeit their pay.  This I have to see.  Whereas the debt ceiling talks have been put off until May 19th, sequester spending cuts will occur in the early March time frame, as scheduled.  It will be interesting to see how DC will react to this.  In all likelihood they'll probably put it off until the debt ceiling issue comes into play but we'll have to see.  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 an Jobs Report 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.

Here's a short 3 minute video on how a trader can use market correlation:
As I write this the crude markets are trading lower and the US Dollar is declining.  This is not 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 exceeded 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 (could be May if POTUS signs) time frame.

Crude oil is trading lower and the US Dollar is declining.  This is not 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 AM EST when the economic news is released and the markets give us better direction.  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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