As of this writing 5:05 AM EST, here’s what we see:
US Dollar –Down at 81.275, the Dec US Dollar is down 20 ticks and is trading at 81.275.
Energies – November Oil is up at 105.46.
Financials – The December 30 year bond is up 6 ticks and is trading at 130.16
Indices – The December S&P 500 emini ES contract is up at 1700.25 and is up 8 ticks.
Gold – The October gold contract is trading down at 1302.70 and is down 67 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 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.
Asia closed mainly higher with exception of the Hang Seng exchange which closed lower. As of this writing all of Europe is trading higher.
Possible challenges to traders today is the following:
1. Building Permits are out at 8:30 AM EST. This is major.
2. Housing Starts are out at 8:30 AM EST. This is major.
3. Crude Oil Inventory is out at 10:30 AM EST. This can move the crude markets.
4. FOMC Economic Projections are out at 2 PM EST. This is major.
5. FOMC Statement & FFR is out at 2 PM EST. This is major
6. FOMC Press Conference starts at 2:30 PM EST. This is major.
Currencies
Yesterday the Swiss Franc made it's move at about 10:15 AM EST after all the economic data was released. The USD hit a high at around that time and the Swiss Franc rose. The USD dropping only lent confirmation to the move. As a trader you could have netted 20 ticks on this trade. And you thought markets weren't correlated? Please note that these charts are December 2013 due to contract rollover.
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| Chart Courtesy of Trend Following Trades |
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| USD December '13 - 9/17/13 |
Bias
Yesterday we said our bias was to the downside as the Bonds were trading higher and Gold was trading in and out of positive territory. However as of late the markets have been rewarding not too stellar news. Case-in-point the NAHB Housing Market Index did not meet expectations and yet the Dow rose. The Dow gained 35 points and the other indices rose as well. Today we aren't dealing with a correlated market however our bias is neutral. Why? Today is FOMC Day and as such the markets historically have never shown any sense of normalcy on this day. Could this change? Of Course. Remember anything can happen in a volatile market.
So here we are. The long awaited question on everyone's mind. Will the Fed taper or not? Is it Sept Taper or bust? We'll find this afternoon at 2:30 PM EST when the Fed holds a press conference. I have no doubt the press will grill Ben Bernanke just as they did in June when they had their last press conference. If the Fed does nothing and doesn't taper, the press will admonish "how can that be when this entire summer you were supposed to taper in September"? The Federal Reserve never said they would taper in September, that was suggested and proposed by the press and pundits and somehow became fact. Now the Fed may taper or perhaps do a scaled down taper, time will tell and we will see. I don't think that's going to be the case but that is my opinion. The reason why I don't think so is the Fed doesn't want to be accused of torpedoing an already fragile recovery and they know if they do this that is a very real possibility. Just about all the people I know in the trading community are banking on the Fed tapering and probably wonder why I don't agree with them. The reasons are political in that as I stated earlier, I don't think the Fed wants to do anything that will tip the scales on a jobless recovery. Additionally as I look at Ben Bernanke and view his actions from 2008 to the present; this is not someone who's afraid to take action if need be. Anyone who's purchased an auto or bought a home in the past 5 years should be grateful that the Fed took the actions that they did. If cooler heads had not prevailed we would have had a far different picture to deal with and it wouldn't be pleasant. I can say the same for JFK during the Cuban Missile Crisis; and oh by the way I'm old enough to remember the Cuban Missile Crisis......
Many of my readers have been asking me to spell out the rules of Market Correlation. Recently 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 a follow up to the first article on Market Correlation, I've produced a second segment on this subject matter and Futures Magazine has elected to publish it. It can be viewed at:
http://www.futuresmag.com/2013/08/16/how-to-exploit-and-profit-from-market-correlation?ref=hp
http://www.traderplanet.com/commentaries/view/164874-trader-tips-the-case-for-fundamental-analysis/
TraderPlanet published an article I produced called The Case for Fundamental Analysis. Feel free to visit and provide any comments you may have. In case you weren't aware Market Correlation is mainly fundamental analysis specific to Futures and the Futures markets.
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. 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 November crude dropped to a low of 104.41 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 $104.12 a barrel and resistance at 105.99. 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. Please bear in mind that the front month for crude is now November and that because of Syria talks crude is degradating in value.
Future Challenges:
- Budget Battle - ongoing.
- Debt Ceiling in the September time frame.
- Military Action in Syria? - September.
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 10:30 AM when inventory numbers are released and 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/12650453/are-the-markets-rewarding-poor-performance
http://www.barchart.com/headlines/story/12241621/syria-turmoil-stirs-markets
http://www.forexcrunch.com/leadership-or-lack-thereof-part-ii/
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 Interested in Market Correlation? Want to learn more? Signup and receive Market Tea Leaves each day prior to market open. As a subscriber, you’ll also receive our daily Market Bias video that is only available to subscribers.
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