Good Morning Traders,
As of this writing 5:05 AM EST, here’s what we see:
US Dollar –Up at 80.360, the March' 14 US Dollar is up 7 ticks and is trading at 80.360. Energies – January Oil is down at 97.17.
Financials – The March 30 year bond is down 3 ticks and trading at 129.03
Indices – The December S&P 500 emini ES contract is up 27 ticks and trading at 1781.75.
Gold – The February gold contract is trading up at 1225.00 and is up 1 tick from its close.
Note: The front month for crude is now January "14.
The front month for Gold is February'14.
The front month for the 30 Year Bond is now March.
The Front month for the USD is now March.
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 higher which is not 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 traded mixed with half the exchanges higher and the other half lower. As of this writing Europe is trading higher.
Possible challenges to traders today is the following:
1. PPI is out at 8:30 AM EST. This is major.
2. Core PPI is out at 8:30 AM EST. This is major.
Currencies
Yesterday the Swiss Franc made it's move at around 10:25 AM EST with no economic news on the agenda. Look at the charts below and you'll see a pattern for both assets. The USD rose at around that time and the Swiss Franc fell. This was a shorting 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. Please note that the front month for both contracts is March, 2014.
Charts Courtesy of Trend Following Trades
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| Swiss Franc - 3/14 - 12/12/13 |
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| USD - 3/14 - 12/12/13 |
Bias
Yesterday we said our bias was to the downside as the futures were nearly correlated in that direction. The Dow dropped 105 points and the other indices lost ground as well. Today we aren't dealing with a correlated market however our bias is to the upside. Why? The Bonds are trading lower (as of this writing) and Gold is trading higher. Additionally Europe is currently trading higher. Could this change? Of Course. Remember anything can happen in a volatile market.
Well despite positive retail sales from Black Friday and beyond, it wasn't enough to propel the markets forward. It would seem that since Tuesday the markets are more concerned with the Fed Taper talk as well the Budget deal between the GOP and Democrats in Congress. From the market's point of view it seems that there's too much uncertainty regarding these issues so the safe play is to ride it out and keep your money on the sidelines. One thing is for certain; until the Fed gives a clear direction as to what it's intention is the market will continue to perform as it is now....
As an update to this commentary, overnight the House passed the two year budget deal which will now go to the Senate for approval.
Each day in this newsletter we provide viewers a snapshot of the Swiss Franc versus the US dollar as a way and means of capitalizing on the inverse relationship between these two assets. Futures Magazine recognized this correlation as well. So much so that they printed a story on it in their December issue. That story can be viewed at:
http://www.futuresmag.com/2013/11/25/correlated-opportunities-in-the-swiss-franc?ref=hpMany 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. Yesterday January crude dropped to a low of 97.33 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 $96.93 a barrel and resistance at 97.95. 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 - Overnight the House of Representatives passed the Two Budget Deal conceived by Patty Murray and Paul Ryan. I must admit I'm pleasantly surprised that this met approval so early in the process. It certainly beats the specter of a looming shutdown. Now the bill goes to the Senate where it's expected to pass...
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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