As of this writing 5:10 AM EST, here’s what we see:
US Dollar –Down at 81.940 the US Dollar is down 11 ticks and is trading at 81.940.
Energies – June Oil is down at 96.15.
Financials – The June 30 year bond is up 6 ticks and is trading at 146.29.
Indices – The June S&P 500 emini ES contract is down at 1627.00 and is down 7 ticks.
Gold – The June gold contract is trading down at 1460.00 and is down 48 ticks from its close.
Initial Conclusion: This is not a correlated market. The dollar is down- and oil is down- which is not 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 down and the US dollar is trading lower which is not correlated. Gold is trading lower which is not correlated 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 Indian Sensex and Singapore exchange closing higher the rest of Asia closed lower. Overnight the Chinese reported CPI that came in 2.4% higher than the year ago period. This set the motion for the Asian markets to trade lower. When the markets first opened they were poised to go higher and originally did, however this report drove them lower. As of this writing all of Europe is trading lower.
Possible challenges to traders today is the following
1. Unemployment Claims are out at 8:30 AM EST. This is major.
2. Wholesale Inventories are out at 10 AM EST. This is not major.
3. Natural Gas Inventories are out at 10:30 AM EST. This will move the Nat Gas market.
4. 30 Year Bond Auction starts at 1 PM EST.
Yesterday we said our bias was to the upside because the USD was down and Asia/Europe closed to the upside. The net result? The Dow closed up 49 points. According to the rule of 3, this is a real rally. Today the markets aren't correlated and our bias is to the downside. Why? The Bonds are trading higher which is bearish for the markets. Asia closed mixed and currently Europe is trading lower. Could this change? Of Course. Remember anything can happen in a volatile market.
On Tuesday German Factory Orders were released at 6 AM EST that showed a 4% increase month over month. In contrast the US reported Factory Orders last Friday that showed a decline of -2.8%. German Industrial Production was released yesterday that showed a gain of 1.2%. Many traders I know have asked well it that’s true and the US is doing so badly why are the US markets advancing on an almost daily basis? Every day it seems as though the markets are advancing to higher highs. How can that be? Well as traders, let’s put our thinking caps on. Earlier this year the US government mandated a 5% increase in capital gains taxes; meaning that whatever income is derived from passive investments or trading this year, you will be taxed at a 20 percent rate versus 15 percent under the Bush Tax Cuts. At first everyone (including the Smart Money) was concerned that this was going to slow down investment. On the contrary it seems to have the opposite effect. Why? Well let’s think about it. If you’re a high net worth individual and you know that you face a 5% increase in taxes yet you’re not interested in a reduction of your lifestyle, what can you do? Invest more, trade more, and increase the scope and volume of your investing such that you can augment the negative aspects of a tax increase. And the Smart Money? They have no problem telling you that the markets are going up indefinitely which is pretty much what they did in the 1990’s and early 2000’s.
Want proof? Look back at the Clinton years when the tax rate was 39.6 percent. The markets were doing pretty good then, weren’t they? Of course back then the US really did have a strong economy.
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 to the downside. Could this change? Of course. In a volatile market anything can happen. We'll have to monitor and see.
On Wednesday, May 1st I had the opportunity to interview Markus Heitkoetter. Markus is the CEO of Rockwell Trading and is living proof that anyone with the right mindset, desire and tenacity can be a successful trader. He offers a 296 page eBook that can be viewed on the Rockwell Trading website. It's entitled "The Complete Guide to Day Trading" I recall when Markus started Rockwell years ago and was always impressed with his focus on coaching and paying attention to detail. Once again our friends at TradersLog have agreed to publish the article and it can be viewed at:
The video can be viewed at:
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. On Friday June crude dropped to a low of 95.26 a barrel and held. We'll have to monitor and see if crude either goes lower or holds at the present level. It would appear at the present time that crude has support at 92.00 a barrel and resistance at 98. 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.
- Budget Battle - ongoing.
- Debt Ceiling in the August time frame.
- European Contraction - happening now
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 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.
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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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