Good Morning Traders,
As of this writing 5:10 AM EST, here’s what we see:
US Dollar –Down at 80.445, the US Dollar is down 93 ticks and is trading at 80.445.
Energies – February Oil is down at 100.24.
Financials – The March 30 year bond is up 2 ticks and trading at 128.11.
Indices – The March S&P 500 emini ES contract is down 2 ticks and trading at 1836.00.
Gold – The February gold contract is trading down at 1203.80 and is down 102 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 lower and the US dollar is trading lower which is not 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.
Asia traded mainly higher with 4 of the 6 exchanges trading higher. As of this writing Europe is trading lower.
Possible challenges to traders today is the following:
1. Pending Home Sales is out at 10 AM EST. This is major.
2. Lack of other major economic news.
Currencies
On Friday the Swiss Franc made it's move at around 9:30 AM EST with no major economic news to speak of. 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 20-30 ticks on this trade. Notice that even without a tsunami of economic reports, the rules of market correlation still hold true.
Charts Courtesy of Trend Following Trades
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| Swiss Franc - 03/14 - 12/27/13 |
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| USD - 3/14 - 12/27/13 |
Bias
On Friday we said our bias was to the upside as the financials were correlated. However the markets closed fractionally lower as the Dow dropped 2 points. Today we aren't dealing with a correlated market and our bias is neutral. A neutral bias means the markets could go in any direction today. The telltale sign could be Pending Home Sales out at 10 AM as this is a proven market mover and the only major economic report we have today. Could this change? Of Course. Remember anything can happen in a volatile market.
On Friday we said our bias was to the upside as the financials were correlated to the upside, Asia closed higher and Europe was trading higher. As expected the markets did open higher and stayed there until around 10 AM but then proceeded to drop. The rest of the day the markets traded in and out of positive territory. What do I think about that? From my point of view it was an even keeled day as the markets didn't drop off the side of a cliff but closed fractionally lower. This is normal as Friday was the last trading day of a holiday week and we can expect more this week as well with New Year approaching. Today we have Pending Home Sales which is major and could potentially be a market mover. Time will tell if this is the case.
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 neutral. 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 higher and the US Dollar is higher. 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 99.37 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 $98.75 a barrel and resistance at 101.53. 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 higher and the US Dollar is higher. 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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