Wednesday, March 20, 2013

Pre-Market Global Review - 3/20/13 - FOMC Day

Good Morning Traders,
As of this writing 5:00 AM EST, here’s what we see:
US DollarDown at 83.200 the US Dollar is down 11 ticks and is trading at 83.200.  
Energies – May Oil is up at 92.78.
Financials – The June 30 year bond is down 6 ticks and is trading at 143.13
Indices – The June S&P 500 emini ES contract is up at 1546.50 and is up 18 ticks.
Gold – The April gold contract is trading down at 1609.80 and is down 14 ticks from its close.

Quick Note: Unless otherwise shown the above contract months are now June.   

Initial Conclusion: This is a nearly correlated market to the upside.  The dollar is down- and oil is up+ which is normal and the 30 year bond is trading lower.  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 which is correlated.  Gold is trading lower which is not correlated with the US dollar trading up.   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. 

Asia closed mixed with the Aussie, Hang Seng and Sensex exchanges closing lower and the rest of Asia closing higher.  As of this writing all of Europe is trading higher. 

Possible challenges to traders today is the following

1.  Crude Inventory is out at 10:30 AM EST.  This will move the crude market.
2.  FOMC Economic Projections are out at 2 PM EST.  This is major.
3.  FOMC Statement is out at 2 PM EST.  This is major.
4.  Federal Funds Rate is out at 2 PM EST.  This is major.
5.  FOMC Press Conference starts at 2:30 PM EST.  This is major. 

Yesterday we said our bias was to the downside because the USD and bonds were trading higher.  However after spending half the day in negative territory the Smart Money decided that after two days of losses, they weren't going to let the Dow close in negative territory.  Hence th net result being that the Dow closed 4 points higher.  The rest of the indices closed lower.  Today the markets are nearly correlated with the missing ingredient being Gold.  But after two days of going to higher highs, the fear factor with Gold is subsiding, so our bias today is to the upside but bear in mind that today is FOMC Day and anything can happen.  Asia closed mixed but Europe is currently trading higher.  Both the USD and Bonds are trading lower.  When bonds are lower, this is typically bullish for the indices.  Could this change? Of Course.  Remember anything can happen in a volatile market.

Much has been written about the Cyprus conundrum. Just about every news story for the last two days has been about the Cyprus bailout.  Forex Crunch has published an article I've written on the subject,  It can be viewed at  I find it very interesting that yesterday a few minutes before the close of trading a report came out that stated "ECB to Offer Liquidity to Cyprus" and the Dow closed 4 points higher.  Interestingly enough this "report" hasn't been substantiated by any other news bureau other than Fox News.  Call me Irish (St. Patty's Day just past) but it seems to me that some entity didn't want the Dow to close in negative territory after two consecutive days of losses.  Smart Money at work?   Enough said.  

Today is FOMC Day and as those of you who've been with Market Tea Leaves for awhile know, I don't trade on FOMC Day.  For me, the markets have never shown that they act with any sense of normalcy on this day.  The issue is not if whether or not the FOMC will raise the FFR (Federal Funds Rate aka the Overnight Rate) but the emphasis will be on the language they use.  Every analyst and pundit will attempt to interpret the language they use.  They will have a press conference at 2:30 PM so it will be interesting to hear what, if any new twist or program they will use going forward.  Many people are calling for Ben Bernanke's head and no doubt if the other party won in November, he'd be gone by now.  But you have to careful what you wish for as Ben Bernanke is an ardent student of business history and one the things he studied was the cause of the Great Depression of the 1930's.  He knew that without credit, no modern economy could function.  This provided a good blueprint in 2008 during the financial meltdown.  We'll just have to see what they say come this afternoon. 

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.

As I write this the crude markets are trading lower and the US Dollar is advancing.  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 dropped to a low of 92.36 a barrel and held.  We'll have to monitor and see if crude either goes lower or holds at the present level.   It seems that at the present time crude's support is at 92.00 with resistance at 96.00 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 lower and the US Dollar is advancing.  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 when the inventory numbers are released and 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.

To view previous issues of Market Tea Leaves visit our archive.

No comments:

Post a Comment