Good Morning Traders,
As of this writing 5:25 AM EST, here’s what we see:
US Dollar –Up at 80.940, the Dec US Dollar is up 198 ticks and is trading at 80.940.
Energies – January Oil is down at 93.42.
Financials – The December 30 year bond is down 1 tick and trading at 131.28.
Indices – The December S&P 500 emini ES contract is up 19 ticks and trading at 18.9.00.
Gold – The December gold contract is trading down at 1231.00 and is down 130 ticks from its close. Note: The front month for crude is now January "14.
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 higher and the US dollar is trading higher which is not correlated. Gold is trading lower 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 traded mainly higher with the exception of the Hang Seng and Shanghai exchanges. As of this writing all of Europe is trading higher.
Possible challenges to traders today is the following:
1. Pending Home Sales are out at 10 AM EST. This is major
2. Lack of major economic news.
Currencies
On Friday the Swiss Franc made it's move at around 8:30AM EST with no real economic news to speak of. Notice that both charts have double tops and double bottoms. In the trading world this is significant because the markets are telling you "no more", here's my support or resistance line. Subsequently the USD fell and the Swiss Franc rose. This was a long opportunity on the Swiss Franc. The key to capitalizing on these trades is to watch the USD movement. The USD rise only lent confirmation to the move. As a trader you could have netted 20 plus ticks on this trade.
Charts Courtesy of Trend Following Trades
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| Swiss Franc - 12/13 - 11/22/13 |
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| USD - 12/13 - 11/22/13 |
Bias
On Friday we said our bias was to the upside as both the USD and Bonds were trading lower and Gold looked as though it would go higher. The Dow rose 55 points and stayed above the 16000 level. The other indices rose as well. Today we aren't dealing with a correlated market however our bias is to the upside. Why? The Iran Nuclear accord is driving the price of crude and Gold lower but the futures are moving up. Could this change? Of Course. Remember anything can happen in a volatile market.
On Friday we said our bias was to the upside as both the USD and Bonds were trading lower and Gold was on the cusp of trading higher. Bottom line, the markets were correlated to the upside. The net result being the Dow rose 55 point, the Nasdaq rose by 23 and the S&P rose by 9. All this without any major economic news (good or bad) to drive the markets in any direction. And you thought Market Correlation was only for futures? Market Correlation provides insight as to what could occur in the trading day is designed to make you aware of that fact. The question now is will the Dow retain that 16000 level? Time will tell but today we only have Pending Home Sales to contend with, however come tomorrow we'll see the return of the tsunami in terms of economic reports...
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.
As I write this the crude markets are trading lower and the US Dollar is advancing. 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. On Friday January crude dropped to a low of 94.05 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 $92.82 a barrel and resistance at 94.47. 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 advancing. This is normal. Crude typically makes 3 major moves (long or short) during the course of any trading day: around 9 AM EST, 11 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 reports 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.
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