Wednesday, February 27, 2013

Pre-Market Global Review -2/27/13 - Bernanke Bounce


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  from the Market's “tea leaves” as to what the market is doing or is likely to do.  

February 27, 2013

Good Morning Traders,

As of this writing 5:40 AM EST, here’s what we see:
US Dollar –Down at 81.780 the US Dollar is down 160 ticks and is trading at 81.780. 
Energies – April Oil is down at 92.90.
Financials – The 30 year bond is up 9 ticks and is trading at 145.29.
Indices – The March S&P 500 emini ES contract is up at 1492.75 and is up 1 tick.
Gold – The April gold contract is trading down at 1607.50  and is down 80 ticks.
This is a completely uncorrelated market.   The dollar is down- and oil is up+  which is normal but the 30 year bond is trading higher.  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 and the US dollar is trading lower.  Gold is trading lower which does not correlate with the US dollar trading down.   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 Aussie and Nikkei all of Asia closed higher.  Europe has been flip flopping between negative and positive territory all morning.  Currently all the indices are trading fractionally higher but be aware that this can change.  Europe is concerned that Italy did not have a clear winner in their elections and be advised that ECB President Mario Draghi will be speaking at 12:30 PM EST.   

  Possible challenges to traders today is the following:

-  Core Durable Goods Orders are out at 8:30 AM EST.  This is major.
-  Durable Goods orders are out at 8:30 AM EST.  This is major
-  Pending Home Sales are out at 10 AM EST.  This is major.
-  Chairman Bernanke Testifies at 10 AM EST.  This is major.
-  Crude Oil Inventories are out at 10:30 AM EST.  This will move the crude market.
-  ECB President Draghi speaks at 12:30 PM EST.  This is major.

Yesterday we said our bias was toward the short side because the markets were completely correlated to the downside. We did have pre-market news that claimed Home Prices Highest in Seven Years.  Really?  Has anyone tried to sell their house recently?  Do you really believe that?  But again as I mentioned a couple of weeks ago, people see these headlines and go with it even though it has no basis in reality.   I have to wonder who's paying these reporters?  Sounds like the Smart Money at work.  In any case Chairman Bernanke started to address Congress at 10 AM and the market never looked back.  An interesting aspect to this was that despite the market going higher the fundamentals still pointed to a lower market.  The USD and Bonds were trading higher as Bernanke spoke and even after the market closed still pointed to a lower market.  This can mean only one of two things: a.) the underlying market fundamentals will correct or b.) the market will go lower.  As I write this the underlying market fundamentals have not corrected and we are not dealing with a correlated market.  As such our bias is neutral.  Here's why.  We suspect that the Smart Money may look to take money off the table but we have Bernanke speaking.  I would advise my followers to be selective on your trading today, if at all.  We have the added impact of Mario Draghi speaking and we have no idea what he's going to say.  Thus far each time he speaks the USD goes higher and our markets go lower.  The same thing happened on President's Day and fortunately the US markets were closed.  Could this change?  Of course.   Remember anything can happen in a volatile market.
The great thing about market correlation is that it gives you an insight as to what the market fundamentals are.  Now you might ask yourself "why is that important"?  It's important because markets generally tend to lean towards those fundamentals regardless of what news is being reported.  Are there exceptions?  Of course.  Look what happened yesterday, the markets were poised to go lower but didn't.  Mid-morning after this newsletter was published, the markets changed direction abruptly.  But as a trader if you see that it changed abruptly, take the appropriate action.  Remember that as traders, your number one rule is to preserve your trading capital because without it there is no trading. 

Yesterday was interesting because the markets completely ignored fundamentals and focused on the fact that Ben Bernanke was speaking.  This phenomena is known as the "Bernanke Bounce."  But typically this happens after Bernanke speaks, typically in the afternoon.  That didn't happen yesterday as the markets went straight up after he started to speak.  Will the same situation happen today?  We'll have to monitor and see.  It could be that there was pent up demand after Monday's sell off. 

For some time now we've been saying that next round of challenge for traders will be the sequester cuts scheduled to start on March 1st.  March 1st is 2 days away and yet no one is raising this as any issue relative to the economy or markets in general.  It seems to me that everyone is betting on the concept that at the very last moment Congress will come together and get something done.  Just so you're aware of what will be cut if Congress does not come to terms on this issue:

- Education
- Small Business
- FDA Food Inspections
- Research and Development
- FBI and law enforcement
It is painfully aware to me that Congress has no intention of doing anything on this issue.  The GOP wants sequestration to happen.  They seem to believe that their number one goal is to starve the government.  What they fail to realize is that we the people are the government.  They don't seem to be mindful of the fact that many innocent government employees (FBI, Law Enforcement, Meat Inspectors, etc.) will be effected by the sequester and will wind up on furlough and hence unemployed.  Unemployment will increase and this no doubt will spill over to the private sector.  Does anyone know any employer who wouldn't jump at the chance to layoff?  I don't.  Think about this for a moment.  It's illegal for any food retailer to put out meat that isn't inspected.  If a particular type of meat isn't inspected, they can only put meat that is and has been inspected.  What do you think will happen to the prices of meat that they can legally put out?  You guessed it.  The price of that meat will go up.  This is one simple example.  What about milk, eggs and any other staple we take for granted?  They need to understand that what they are doing is liken to the person stuck in a dark cave with a stick of dynamite in one hand and a match in the other; and then they light the match to see their way forward.  Currently Congress isn't even in session right now and I suspect that they are willing to throw caution to the wind and see what happens.  I would also suggest that this will change come April 15th.  Why April 15th?  Because it's tax day?  No.  The bill that Obama just recently signed extends the debt ceiling into May but if Congress can't get a balanced budget by April 15th, they will forgo their pay.  This I have to see.  Of course  Speaker Boehner has no problem blaming the President but fails to mention that legislation comes out of the House of Representatives and currently there is no bill on the floor to vote on.   As an update to this the Senate will be voting on a bill to balance the sequester spending cuts with revenue increases but the GOP will hear none of it.  Speaker Boehner publicly stated yesterday "they've already had their revenue increase."   
This is the new and improved GOP in action.  They won't outwardly hold the country hostage as they did in 2011; they'll set up events such that it works out that way.  So come March 1st they'll just innocently sit back and say "oh well we have to cut, it's the law you know."  I've been wondering why they're so eager to extend the debt ceiling.  They're waiting for a tsunami of events to occur such that there will be no other alternative.    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.  The Smart Money is loving it because thus far they made any issues about March 1st or sequester spending cuts.  Will the markets survive? of course.  But it also seems to me that the GOP knows all too well that Congress will only act when it has to.  In other words, they know that DC drags it's feet when it comes to spending cuts and they've setup events such that it has to happen. 
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 higher open and our bias is towards the long side.  Could this change?  Of course.  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.

Oftentimes we listen to traders talk about problems and issues they are confronted with.  One issue that keeps re-surfacing deals with trader psychology.  Now I can deal with a market issue, I can deal with a trading issue but I'm not a trading psychologist.  A good friend of Market Tea Leaves, Mr. Norman Hallett has been a leader in this field for over 20 years.  I've followed his work for over 8 years and I highly recommend it.  You can view Norman at:

Additionally Norman puts out a weekly 4 minute drill for traders that's worth looking at.  If you as a trader are having issues trading, I would strongly recommend viewing his program and the 4 minute drill for traders.  Here's one worthy of note:

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 went to a low of 92.07  but did not stay there long.   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 March 1st.
 - Debt Ceiling in the May time frame.
 - European Contraction

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 Ben Bernanke is done testifying before Congress today.  This should be in the afternoon.  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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