Good Morning Traders,
As of this writing 4:10 AM EST, here’s what we see:
US Dollar –Down at 70.960, the Dec US Dollar is down 603 ticks and is trading at 79.960.
Energies – November Oil is down at 102.15.
Financials – The December 30 year bond is up 23 ticks and is trading at 133.22.
Indices – The December S&P 500 emini ES contract is down at 1707.75 and is down 22 ticks.
Gold – The December gold contract is trading up at 1306.60 and is up 253 ticks from its close.
Initial Conclusion: This is not a correlated market. The dollar is down- and oil is down- which is not 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 down and the US dollar is trading lower which is not 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 closed mixed with half the exchanges trading higher and the other half trading lower. As of this writing all of Europe is trading lower.
Possible challenges to traders today is the following:
1. Unemployment Claims are out at 8:30 AM EST. This is major.
2. Philly Fed Manufacturing Index is out at 10 AM EST. This is major.
3. FOMC Member Evans Speaks at 12:45 PM EST. This is major.
4. FOMC Member George Speaks at 12:45 PM EST. This is major.
Currencies
Yesterday the Swiss Franc made it's move at around 8:15 AM EST This was a shorting opportunity as the USD hit a low at around that time and proceeded to rise, the Swiss Franc dropped at the around the same time. The key to capitalizing on these trades is to watch the USD movement. 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? And this is with a government shutdown which means these rules will work regardless of what else is going on....
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| Chart Courtesy of Trend Following Trades |
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| USD - 12/13 - 10/16/13 |
Bias
Yesterday we said our bias was to the upside as the markets were correlated as such. The net result being that the Dow gained 206 point and the other indices rose as well. I guess everyone expected a debt ceiling deal coming out of DC. DC didn't disappoint as shortly after midnight Obama signed the deal. Today the markets aren't correlated and hence our bias is to the downside. I guess the strategy of "buy the rumor, sell the news" is alive and well on Wall Street. Could this change? Of Course. Remember anything can happen in a volatile market.
The markets rose yesterday with the expectation that a debt ceiling deal would be solidified in DC. This is still ongoing as I write this but the latest bill which is the Senate one raises the debt ceiling until February and ends the government shutdown until January 15th. This only buys us a few months time after which we will be right back where we are right now. It seems to me that DC cannot get their act together and all we get are these stop-gap measures that buy us a little time and we're right back it again. The Senate is still voting on this bill and then it must proceed to the House who has to vote on it and then it will be forwarded to President Obama for approval. Talk about a last minute deal....
As an update to this, shortly after midnight President Obama signed the debt deal which averted a default. However we need to take this with a grain of salt as the government will reopen immediately until January 15th and the US will raise it's debt ceiling until February 7th but a bi-partisan committee will be appointed that will address these issues headed by Democrat Patty Murray of Washington and Republican Paul Ryan (yes, that Paul Ryan) of Wisconsin. Of course this "committee" will be staffed by half Democrats and half GOP'ers and is expected to have something agreed upon by December 13th. Has Washington learned anything in the four years? This is 2011 all over again whereby a "committee" was appointed and achieved absolutely nothing as neither party could come to terms with the other. Paul Ryan as a Co-chair? The same Paul Ryan that wants to kill Medicare and Social Security. The same Paul Ryan that ran on that platform in 2012 and lost. Both of these individuals came up with budgets earlier this year and they are direct opposites to one another. The only thing that was achieved by this drama was a reprieve or "armistice" to the next battle, which will come shortly....
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: http://www.traderslog.com/john-karnas/
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. Yesterday November crude dropped to a low of 100.76 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 $101.50 a barrel and resistance at 103.70. 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 - Forthcoming.
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/12650453/are-the-markets-rewarding-poor-performance
http://www.traderplanet.com/commentaries/view/164874-trader-tips-the-case-for-fundamental-analysis/
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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