As of this writing 4:30 AM EST, here’s what we see:
US Dollar –Up at 82.435, the Sept US Dollar is up 293 ticks and is trading at 82.435.
Energies – October Oil is down at 106.75.
Financials – The September 30 year bond is down 41 ticks and is trading at 132.01
Indices – The September S&P 500 emini ES contract is up at 1648.25 and is up 68 ticks.
Gold – The October gold contract is trading down at 1388.80 and is down 70 ticks from its close.
Initial Conclusion: This is not a correlated market. The dollar is up+ and oil is down- which is normal but 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 higher which is not 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 mainly higher with the exception being the Indian Sensex exchange. As of this writing Europe is trading mainly higher with the exception of the Paris exchange which is trading fractionally lower.
Possible challenges to traders today is the following
1. Final manufacturing PMI is out at 9 AM EST. This is not major.
2. ISM Manufacturing PMI is out at 10 AM EST. This is major.
3. Construction Spending is out at 10 AM EST. This is major.
4. IBD Economic Optimism is out at 10 AM EST. This is major.
5. ISM Manufacturing Prices is out at 10 AM EST. This is major.
Currencies On Friday the Swiss Franc made it's move at around 8:30 AM after not too stellar economic news was reported. Interestingly enough if you follow what we teach in terms of Market Correlation and compare the Swiss Franc to the USD, you would notice that at around 8:30 AM the USD hit a low and proceeded to appreciate in value. The Swiss Franc on the hand dropped at around that same time proving correlation. As a trader you could have netted 20-30 ticks on this trade.
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| Chart Courtesy of Trend Following Trades |
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| USD - 8/30/13 |
Bias
On Friday we said our bias was neutral as we felt the markets could go in any direction. Well Mr. Market decided to go lower as the Dow dropped 31 points and the other indices lost ground as well. Why did we choose a neutral bias? Gold was down and Europe began to sell-off in a matter of minutes. The geopolitical situation in Syria was not conducive to a positive market. Today we are not dealing with a correlated market, however our bias is to the upside. Why? The Bonds are trading lower which is always bullish plus this is the first trading day after a 3 day holiday weekend and traditionally the markets rise after a 3 day weekend. Additionally traders have seen the upswing in the last two days in Asia and Europe with the US military intent clear in Syria. Up till this weekend that was a question: will the US intervene? That is no longer a question as the intent is clear. True, Obama seeks Congressional support but at least we know what the intent is. Could this change? Of Course. Remember anything can happen in a volatile market.
This past month of August has proven to be the worst trading month in over a year. We began with taper talk and we're ending with strife in Syria. No doubt this week Syria will play front and center in terms of news as no one know yet what the US will do. The UK has made their poistion clear: they will not get involved and I think this decision caused the markets to drop on Friday. But to be fair to the Brits (many of whom I consider friends) they do not want to be pulled into another Iraq War and who can blame them? The US hopes that Russia will at the very least side with them on the United Nations front, but that isn't clear yet either. All of this has led to confusion in the markets and the markets do not like uncertainty even though the markets themselves are most uncertain entity on the planet. One thing is certain, once a decision is made it will become business as usual. Many pundits are claiming another upswing because after the Iraq War was started in 2003, the markets saw an upswing. The same thing happened in 1991 during the Gulf War. My take is a bit different. If we have an upswing (and we probably will) it's because the market is oversold; not because a war was started. Need proof? Since the beginning of August the Dow has dropped over 800 points. I do not subscribe to the perception that war is "good for the economy". That notion started in World War 2 when the United States was unprepared for global conflict. That is clearly not the case today. War kills people and also creates other problems in terms of long term medical and rehabilitation costs. We do not yet know what the final bill will be for the conflicts in Iraq and Afghanistan and yet here we are discussing possible conflict in Syria.
It is Saturday August 31st as I write this and I just heard Obama's speech regarding military action on Syria. It is very clear that he is intent on taking military action but I don't think he understands the ramification of this. The markets will do well on this news but if it turns out to be a long term situation, job growth in this country will suffer. Employers today in the United States look for any reason not to add jobs and this will do just fine for them. Does anyone wonder why there's more growth in part time jobs? Because employers don't want long term commitment or responsibility. Part time workers aren't eligible for benefits, vacations, paid time off or retirement. Employers will blame ObamaCare and sadly there is some merit to this. ObamaCare has rules, regulations that employers aren't familiar with or have ever had to deal with before. As an example, UPS will no longer cover spousal benefits if that spouse is eligible for coverage elsewhere. In the meantime we will now have Congressional debates on whether we take military action in Syria...
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
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 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 October crude dropped to a low of 106.96 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 $106.26 a barrel and resistance at 107.72. 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 September time frame.
- Military Action in Syria - September.
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.
Recently Published Articles:
http://www.barchart.com/headlines/story/10598425/when-perception-becomes-reality
http://www.forexcrunch.com/the-sitzkrieg-jobs-report/
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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