Tuesday, March 26, 2013

Pre-Market Global Review - Cyprus Conundrum Resolved? -not quite....

Good Morning Traders,
As of this writing 5:55 AM EST, here’s what we see:
US DollarUp at 83.015 the US Dollar is up 20 ticks and is trading at 83.015.  
Energies – May Oil is up at 95.23.
Financials – The June 30 year bond is down 10 ticks and is trading at 143.06
Indices – The June S&P 500 emini ES contract is up at 1550.00 and is up 12 ticks.
Gold – The April gold contract is trading down at 1596.90 and is down 77 ticks from its close.

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

Initial Conclusion: This is not a correlated market.  The dollar is up+ and oil is up+ which is not 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 higher which is not correlated.  Gold is trading lower which is 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, Nikkei and Shanghai exchanges closing lower; the rest of Asia closed higher.  As of this writing all of Europe is trading higher. 

Possible challenges to traders today is the following

1.  Core Durable Goods are out at 8:30 AM EST.  This is major.
2.  Durable Goods are out at 8:30 AM EST.  This is major.

3.  S&P/CS Composite-20 HPI y/y is out at 9 AM EST.  This is not major.
4.  CB Consumer Confidence is out at 10 AM EST.  This is major. 
5.  New Home Sales are out at 10 AM EST.  This is major.
6.  Richmond Manufacturing Index is out at 10 AM EST.  This is major.

Yesterday we said our bias was to the long side because an accord was reached between the Cypriot government and the Troika (ECB, EU and IMF)Initially the markets did go higher but some comments mad by officials changed all that and the Dow fell by 64 points.  Today our bias in neutral because the markets aren't correlated and we have a tsunami of economic news that can drive the markets in any direction.  Could this change? Of Course.  Remember anything can happen in a volatile market.

Yesterday we said that the markets were poised to go higher because an agreement was reached between the Cypriot government and the Troika (ECB, EU and IMF).  Initially all markets went higher but after 10 AM the Dutch Finance Minister basically stated that what happened in Cyprus will serve as a template for all other EU nations.  Well the Euro dropped, the USD rose and all markets dropped.  I was wondering why no mention was made of the levy that will be imposed on those individuals who have more than 100,000 Euros in a Cypriot bank.  I've heard that the rate will be about 30%.  We don't know if this is true or not but one thing is certain: these officials need to think about what they say before they say it.  Their comments could cause a panic liken to what we saw yesterday.  If you ask me they need to go to Fred Astaire charm school.

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 our bias is neutral because we feel that this market could go in any direction.  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 higher and the US Dollar is advancing.  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 dropped to a low of 94.01 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 higher and the US Dollar is advancing.  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 when 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.

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

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