As of this writing 4:35 AM EST, here’s what we see:
US Dollar –Down at 81.240, the Sept US Dollar is down 83 ticks and is trading at 81.240.
Energies – September Oil is up at 104.52.
Financials – The September 30 year bond is up 12 ticks and is trading at 134.09.
Indices – The September S&P 500 emini ES contract is up at 1690.75 and is up 10 ticks.
Gold – The August gold contract is trading up at 1290.10 and is up 46 ticks from its close.
Initial Conclusion: This is not a correlated market. The dollar is down- and oil is up+ which is 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 up and the US dollar is trading lower which is correlated. Gold is trading higher which is 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.
Asia closed mainly higher with the exception being the Japanese Nikkei and Shanghai which closed lower. As of this writing Europe is trading fractionally higher.
Possible challenges to traders today is the following
1. Unemployment Claims are out at 8:30 AM EST. This is major.
2. Natural Gas Storage out at 10:30 AM EST. This will move the Nat Gas market.
3. 30 Year Bond Auction Starts at 1 PM EST.
Currencies
As a follow up to what happened yesterday with the Canadian Dollar, like clockwork it did make a move at 10 AM EST. Additionally a savvy trader could have placed a trade to go long at 9AM. What happened? Canada reported Building Permits at 8:30 AM EST that weren't too stellar. When then happened is the CDN took a slight dive, hit a bottom and then went up. The same situation occurs with the USD when the US has not too stellar economic news. Want proof? Take a look at a chart of the USD from last Friday's Jobs Report. It dropped like a rock, hit bottom and then proceeded to advance...
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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 both the USD and the Bonds were trading higher, which is not bullish for the markets or indices. This plus Gold was trading lower, which isn't positive either. The net result being that the Dow closed 48 points lower and the other indices lost ground as well. Today we are not dealing with a correlated market however our bias is to the upside. Could this change? Of Course. Remember anything can happen in a volatile market.
It would appear as though we're in the midst of another worldwide sell off. Each day this week thus far the Asian markets haven't advanced, Europe is trading lower and the US markets are following. Unfortunately for the remainder of this week we don't have any major economic news to break the deadlock. So it going to be up to the politicos or the Fed to do this. Unfortunately the Fed still believes in the Democratic process and doesn't mandate singing out of the same hymn book, so to speak. This is very different from Corporate America. I wouldn't rely too much on the politicos either because from their point of view, everything is fine...
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 upside. 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 declining. 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 September crude dropped to a low of 104.15 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 $104 a barrel and resistance at 107. 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 late August/September time frame.
- Asian Contagion - happening now
Crude oil is trading higher and the US Dollar is declining. 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 the 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.
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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