Good Morning Traders,
As of this writing 5:05 AM EST, here’s what we see:
US Dollar –Down at 80.670, the US Dollar is down 80 ticks and is trading at 80.670.
Energies – February Oil is down at 98.97.
Financials – The March 30 year bond is up 6 ticks and trading at 130.09.
Indices – The March S&P 500 emini ES contract is up 30 ticks and trading at 1822.00.
Gold – The February gold contract is trading down at 1197.00 and is down 65 ticks from its close. Note: The front month for crude is now February "14.
The front month for Gold is February'14.
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 higher and the US dollar is trading lower which is correlated. Gold is trading lower which is not 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.
All of Asia traded higher with the exception of the Nikkei exchange which was closed for a holiday (Emperor's Birthday). As of this writing Europe is trading higher.
Possible challenges to traders today is the following:
1. Core PCE Price Index m/m is out at 8:30 AM EST. This is major. 2. Personal Spending m/m is are out at 8:30 AM EST. This is major.
3. Personal Income m/m is out at 8:30 AM EST. This is major.
Currencies
On Friday the Swiss Franc made it's move at around 8:30 AM EST after the economic news was released. Look at the charts below and you'll see a pattern for both assets. The USD fell at around that time 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 fall only lent confirmation to the move. As a trader you could have netted about 20 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 - 12/20/13 |
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| USD - 3/14 - 12/20/13 |
Bias
Yesterday we said our bias was to the upside as we saw Gold rebounding and the futures pointed upward. As expected the markets opened higher and the Dow closed 42 points higher. The other indices gained ground as well. Today we aren't dealing with a correlated market however our bias is to the upside. Why? The USD is trading lower which is bullish for the markets, Asia traded higher and Europe is currently trading higher. Could this change? Of Course. Remember anything can happen in a volatile market.
On Friday we said the bias was to the upside and the markets didn't disappoint. The Dow was up over 100 points at the height of the session and the Obama started to talk and the markets dropped. Fortunately he spoke late in the day and that didn't stop the markets from showing a gain. Showing a 4.1% gain in GDP didn't hurt of course but I have to wonder how valid this is. I suppose we'll know when the revised numbers come out or better yet in March when 4th quarter GDP numbers are released. At least then we'll know on an annualized basis how well the economy did in 2013. If Obama is thinking that he should take credit for the growth in GDP, he should forget it as what propelled the economy in the 3rd quarter was the continuation of a low interest rate environment with no tapering. Time will tell if the new policy of tapering will have any effect on the economy in either direction: up or down....
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 lower. 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 January crude dropped to a low of 98.54 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 $98.90 a barrel and resistance at 99.30. 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 - Senate passes budget deal, now it's up to Obama to sign.
Crude oil is trading lower and the US Dollar is lower. This is not 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 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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