As of this writing 5:45 AM EST, here’s what we see:
US Dollar – Up at 83.235 the US Dollar is up 83 ticks and is trading at 83.235.
Energies – April Oil is up at 92.76.
Financials – The 30 year bond is down 16 ticks and is trading at 141.02.
Indices – The March S&P 500 emini ES contract is up at 1558.00 and is up 8 ticks.
Gold – The April gold contract is trading down at 1585.80 and is down 26 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 down which is correlated with the US dollar trading higher. 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 Singapore exchanges, Asia closed higher. As of this writing all of Europe is trading higher.
Possible challenges to traders today is the following
- PPI is out at 8:30 AM EST. This is major.
- Unemployment Claims out at 8:30 AM EST. This is major.
- Core PPI is out at 8:30 AM EST. This is major
- Current Account is out at 8:30 AM EST. This is not major.
- FOMC Member Raskin speaks at 9 AM EST. This is major.
- Natural Gas Storage is out at 10:30 AM EST. This will move the Nat Gas market.
- 30 Year Bond Auction starts at 1 PM EST. This is major.
Yesterday we said our bias was to downside with the outlier being Gold. The Dow spent most of the day in negative territory and closed fractionally higher at 5 points. The rest of the indices closed fractionally higher as well. Today the markets are not correlated. However our bias is to the upside. Here's why. Asia closed mainly higher and Europe is currently trading higher. Whereas the USD is currently trading higher, the Bond market is trading lower. When bonds are lower, this is bullish for the indices. Could this change? Of course. Remember anything can happen in a volatile market.
Today we'll focus on the markets. The political front is unchanged and Paul Ryan wants to be known as the man who saved Medicare. Today the Swiss National Bank publicly stated that they will put a cap on the exchange rate of the Swiss Franc at 1.20. They also stated that they will use any means to keep the exchange rate at this level which means that they will purchase a correlated pair. In this case that means the Euro. As the Swiss Franc is more commonly correlated with that currency. The last time they did this was at the end of 2011 as that time the exchange rate for the Swiss Franc was upwards past 1.34 and the Swiss were concerned that an over valued franc would make Swiss products and services more expensive from an export point of view. The Swiss are not the only concerned with this as look what happened recently with the Japanese Yen. The Japanese government has done the exact same thing and the Yen has fallen recently. This is clearly a race to the bottom. No nation wants an overvalued currency as it means that their products and services will be more expensive overseas. I recently produced an article for Forex Crunch called "The USD- Why is it so High?" that explains this phenomena in depth. It can be viewed at:
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.
- 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 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. Also be mindful that the 30 Year Bond Auction starts at 1 PM EST and this can make afternoon trading erratic. 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.
To view previous issues of Market Tea Leaves visit our archive.