As of this writing 4:45 AM EST, here’s what we see:
US Dollar –Up at 81.770, the Sept US Dollar is up 112 ticks and is trading at 81.770.
Energies – September Oil is up at 105.36.
Financials – The September 30 year bond is up 13 ticks and is trading at 133.18.
Indices – The September S&P 500 emini ES contract is down at 1686.50 and is down 31 ticks.
Gold – The August gold contract is trading down at 1279.40 and is down 32 ticks from its close.
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 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 higher which is 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 completely to the downside with every exchange closing lower. As of this writing Europe is trading lower.
Possible challenges to traders today is the following
1. Lack of Major Economic Reports.
2. Crude Oil Inventories are out at 10:30 AM EST. This will move the crude markets.
3. 10 Year Bond Auction Starts at 1 PM EST.
4. Consumer Credit is out at 3 PM EST. This is not major.
Currencies
As a follow up to what happened yesterday with the Canadian Dollar, suffice it to say that the Loonie went up after the 10 AM economic reports. The one aspect that I like about the CDN is it's consistency. It usually moves around the 10 AM time frame after the market settles down and after any known reports As we also mentioned yesterday the Canadian generally moves in 20 tick moves. See the below chart for clarification:
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| Chart Courtesy of Trend Following Trades |
Yesterday we said our bias was to the downside as the markets weren't correlated. Why? In this case Gold was the outlier as the USD and Bonds were both trading lower which usually is bullish for the markets. The Dow closed down 93 points and the other indices lost ground as well. Today we are not dealing with a correlated market however our bias is to the downside. Could this change? Of Course. Remember anything can happen in a volatile market.
It would appear as though the markets extended its malaise from the weekend as it continued to move lower. Some pundits have claimed "well that was because FOMC Member Evans said the Fed should taper sooner." Well folks, he spoke at 1 PM EST and the markets were lower from the very open but as readers of Market Tea Leaves you knew that at 6 AM. Clearly Evans comments didn't help the markets but it was already in a tailspin and it seems as though we're going back to the mode after the last FOMC meeting held in June whereby the market hangs on the comments of an FOMC member regardless of their stance or bias...
Many of my readers have been asking me to spell out the rules of Market Correlation. Today Futures Magazine has elected to print a story on the subject matter and I must say I'm proud of the fact that they did as I'm Author of that article. I encourage all viewers to read that piece as it spells out the rules of market correlation and provides charts that show how it works in action. The article is entitled "How to Exploit and Profit from Market Correlation" and can be viewed at:
http://www.futuresmag.com/2013/08/01/how-to-exploit-and-profit-from-market-correlation
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.
In May, I spoke with John Karnas, CEO of Trend Following Trades. John has an interesting background as he was a trader for a number of years prior to buying Trend Following Trades. John is a believer in Trading Plans and has a very precise method of developing aspiring traders. To download the article I've written, go to:
https://markettealeaves.sharefile.com/d/s0e8e37fe5944fc79
My discussion with John can be viewed at: http://youtu.be/uVwHpMq1604
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 September crude dropped to a low of 104.86 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 $105 a barrel and resistance at 110. 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:
- Budget Battle - ongoing.
- Debt Ceiling in the August time frame.
- Asian Contagion - happening now
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 the 10:30 AM inventory report 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.
Recently Published Articles:
http://www.barchart.com/headlines/story/10598425/when-perception-becomes-reality
http://www.forexcrunch.com/the-sitzkrieg-jobs-report/
http://www.traderslog.com/john-karnas/
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 editions.
Nick
Mastrandrea is the author of Market Tea Leaves. Market Tea Leaves is a free,
daily newsletter that discuses and teaches market correlation. Market Tea
Leaves is published daily, pre-market in the United States and can be viewed at
www.markettealeaves.com
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