Pre-Market Global Review - 10/9/13 - Obama Talk Doesn't Help

Good Morning Traders,
 
As of this writing 4:35 AM EST, here’s what we see:
 
US Dollar –Up at 80.355, the Dec US Dollar is up 223 ticks and is trading at 80.355.             
Energies – November Oil is down at 103.25.       
Financials – The December 30 year bond is up 2 ticks and is trading at 133.015      
Indices – The December S&P 500 emini ES contract is up at 1654.50 and is up 16 ticks.  
Gold – The December gold contract is trading down at 1320.60 and is down 37 ticks from its close.
 
Initial Conclusion: This is a nearly correlated market, unfortunately it is correlated to the downside.  The dollar is up+ and oil is down-  which is normal and 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 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 closed mixed with about half the exchanges closing higher and the other half lower. As of this writing all of Europe is trading lower. 
 
  Possible challenges to traders today is the following:
                                                
1.  FOMC Member Evans Speaks at 10 AM EST.  This is major.       
2.  Crude oil Inventories are out at 10:30 AM EST. This could move the crude markets.  
3.  10 year Bond Auction starts at 1 PM EST.
4. FOMC Meeting Minutes are out at 2 PM EST.  This is major.       
 
     Currencies  
Yesterday the Swiss Franc made it's move at around 10:50 AM EST.  This was a short 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 rising 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....

CS 12/13 - 10/8/13

USD 12-13, 10/8/13

Bias


Yesterday we said our bias was to the downside as the USD was trading higher and Gold was trading lower and Europe was trading lower.  As such the  Dow lost 159 points and the other indices dropped as well.  Today we are dealing with a nearly correlated market but unfortunately it is correlated to the downside; hence our bias is to the downside.  WHY?  The USD and the Bonds are trading higher and Gold is trading lower.  This is not bullish for the markets.   Could this change? Of Course.  Remember anything can happen in a volatile market.

 

Yesterday afternoon President Obama held a press conference in which he explained the current state of affairs relative to the shutdown.  I heard part of the conference on the radio and to me he sounded quite statesmanlike.  Basically he compared the shutdown to someone asking for a raise and more paid time off but reiterated that if your boss says you can't have it, you don't threaten to shut it down or burn down the factory.  I agree but the longer this situation exists the more down days we will have.  Thus far, we've been fortunate that the markets haven't fallen dramatically and in essence has been controlled.  But realistically this cannot continue much longer as if the debt ceiling isn't raised by next Thursday, October 17th; the US will default on it's debts and that will spark a global backlash that won't be pretty.  Some analysts have suggested a 30 percent drop in the S&P and Dow.  I think it could be worst than that.  Secretary of the Treasury Lew will be addressing Congress on Thursday to make them aware of how much worse it could get....


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 downside.  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 higher and the US Dollar is advancing.  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 103.25 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 $102.88 a barrel and resistance at 104.76.  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 - ongoing.      
 


Crude oil is trading higher and the US Dollar is advancing.  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 10:30 AM when the 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.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.