Good Morning Traders,
As of this writing 5:05 AM EST, here’s what we see:
US Dollar –Down at 80.200, the Dec US Dollar is down 167 ticks and is trading at 80.200.
Energies – November Oil is up at 107.75.
Financials – The December 30 year bond is down 11 ticks and is trading at 131.19
Indices – The December S&P 500 emini ES contract is up at 1723.25 and is up 22 ticks.
Gold – The October gold contract is trading up at 1364.30 and is up 583 ticks from its close.
Initial Conclusion: Finally a correlated market, and correlated to the upside. The dollar is down- and oil is up+ which is 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 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.
All of Asia traded to the upside following the Fed announcement. As of this writing all of Europe is trading higher.
Possible challenges to traders today is the following:
1. Unemployment Claims are out at 8:30 AM EST. This is major.
2. Current Account is out at 8:30 AM EST. This is major.
3. Existing Home Sales is out at 10 AM EST. This is major.
4. Philly Fed Manufacturing Index is out at 10 EST. This is major.
5. CB Leading Index is out at 10 AM EST. This is not major
6. Natural Gas Storage is out at 10:30 AM EST. This will move the Nat Gas market.
Yesterday the Swiss Franc made it's move at about 2 PM EST to coincide with the FOMC announcement. After all you can't expect currencies to move on FOMC Day without the announcement, now can you? 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 20-30 ticks on this trade. And you thought markets weren't correlated? Please note that these charts are December 2013 due to contract rollover.
|Chart Courtesy of Trend Following Trades|
|USD - 9/18/13|
Yesterday we said our bias was neutral as it was FOMC Day. A neutral bias means the markets can go in any direction. However as we predicted the Fed did NOT taper nor did they touch the Federal Funds Rate (FFR). As such the Dow soared to new highs and gained 147 points. Today we are dealing with a correlated market and it is correlated to the upside. Therefore our bias is to the upside. Could this change? Of Course. Remember anything can happen in a volatile market.
So Septaper never materialized. That shouldn't come as any surprise to the readers of this newsletter as we've been saying for quite a while that we didn't think the Fed was going to taper. Remember one thing; the Fed never said they were going to taper in September, that was something and the media and "talking heads" came up with. Believe when I tell you that this entire summer I've heard from many of my trading colleagues who wondering in amazement as to why I was standing my ground on this issue. To give you a case-in-point here's a comment from a well known colleague:
Nick, you were absolutely right.
Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.
Credit is certainly due. I was totally wrong. You were absolutely right.
It's not easy going against the grain. You won't be well liked and everyone will think you're the village idiot. But as traders you have to trust your instincts. Want proof? In 1990 I was introduced to a little know company in the software industry called SAP. At the time they less than 100 people in the United States and everyone and I mean everyone thought I was stark raving mad to join them. But I knew there was a crying for what they had in North America. It's 20 years later and no one has called me a village idiot in quite some time...
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:
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:
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 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:
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 104.91 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 $105.73 a barrel and resistance at 108.00. 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 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 AM when the economic news is 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.
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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 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.