Friday, January 25, 2013

Pre-Market Global Review - 1/28/13 - Will FOMC Derail Rally?

This newsletter provides free market direction trading insights that are derived from our seasoned and unique, inter-market analysis.  We hope that this information will provide both the novice and seasoned trader with valuable assistance.  Our approach is to harvest clues clues from the Market's “tea leaves” as to what the market is doing or is likely to do.  

January 28, 2013

Good Morning Traders,
As of this writing 4:10 AM EST, here’s what we see:

US Dollar –Up at 79.900 The US Dollar is up 80 ticks and is trading at 79.900.  
Energies – March Oil is down at 95.81.
Financials – The 30 year bond is up 7 ticks and is trading at 144.09.
Indices – The March S&P 500 emini ES contract is down at 1495.50 and is down 1 tick.
Gold – The February gold contract is trading up at 1656.80 and is up 2 ticks.

This is a mainly correlated market.  The dollar is up+ and oil is down-  which is normal and the 30 year bond is trading up which correlates with the US dollar trading up.  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 down with the US dollar trading higher.  Gold is trading up which again does not correlate with the US dollar trading higher.   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. 

With the exception of the Nikkei and Sensex indices, the rest of Asia closed higher.   As of this writing all of Europe is trading lower. 

  Possible challenges to traders today is the following:

-  Core Durable Goods Orders are out at 8:30 AM EST.  This is major.
-  Durable Goods Orders are out at 8:30 AM EST.  This is major.
-  Pending Home Sales are out at 10 AM EST.  This is major.

On Friday we said that our bias was toward the long side with the net result being that the Dow closed 71 points higher.  It only goes to show you that anything can happen in a volatile market.  Today market correlation is calling for a lower open and our bias is toward the short side.   If Gold were trading lower, I would say this is a completely correlated market to the downside.  Gold also has an element of fear built into it.  I suspect that the fear factor is nonexistent at this time.  Could this change?  Of course.   I would never underestimate the power of the USD to move markets.  Remember anything can happen in a volatile market.

Today we have Durable Goods and Pending Home Sales, all of which are major reports that has the capacity to move the markets.  Later this week we have the FOMC meeting.  No one expects that the FOMC will do anything with the FFR (Federal Funds Rate, commonly called the Overnight Rate).  They've already vowed that they won't do anything with interest rates until the Unemployment Rate drops to 6.5%.  However special attention will be paid to what they say.  In other words analysts will ponder and dissect the wording of the announcement to seek any clues that a change is forthcoming.  I don't think that any change is forthcoming nor do I think that any earth shattering announcements will be made.  Case-in-point, no news conference is scheduled with this report, which tells me that nothing earth shattering will be announced.   However on Friday we will have the monthly Jobs Report which can be earth shattering depending upon what is reported.  One thing is certain, we will have a volatile trading week.

On the political front it appears as though its "all quiet on the western front" as nothing new has occurred.  Our understanding is that the GOP has gone to a retreat in North Carolina this weekend to discuss what their stance will be going forward.  It would seem to me that moderate Republicans (aka the adults in the room) have realized that this Tea Party thing isn't working out too well.  The American people clearly don't want a government that is held hostage.  Last week the GOP dominated House of Representatives passed a measure to extend the debt ceiling for 90 days.  It now has to go to the Democratic controlled Senate and the President for approval.  Between them I don't think it has a chance for passage but the Smart Money is loving it.  They just got a 3 month reprieve from this issue but don't worry, once they realize the measure won't pass that will change.  If you're wondering what this has to do with markets; I would say to you everything.  Look at what happened during the recent fiscal cliff crisis.  If you're wondering why we haven't had correlated markets since the election, look no further.  The markets do not like uncertainty when it comes to fiscal issues and anything that reeks of uncertainty is not viewed in a positive light.  Will the markets survive? of course.  But I suspect that the GOP wants to extend for the very purpose of keeping uncertainty and therefore fear alive.  They know the markets are fickle and the longer the issue remains alive the more uncertainty will be created.

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.  Look at what happened to Apple.  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 market correlation is calling for a lower open and our bias is towards the short side.  Could this change?  Of course.  We could have a Pending Home Sales number that could in fact drive the markets higher or lower.  In a volatile market anything can happen.  We'll have to monitor and see.  For awhile now we've promised a video on how a trader can use Market Correlation in tandem with their daily trading.  A good friend of Market Tea Leaves: Carl Weiss of Sceeto and I produced a video on December 22nd that shows this.  Here it is:

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. On Friday crude almost hit the 97.00 a barrel mark.   So it would seem that at the present time crude's support is at 92.00 with resistance at 97.00 a barrel.  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:

 - Sequester spending cuts to commence around early March
 - Debt Ceiling also around the early March time frame.

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 AM EST when the economic news is 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. 

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 blogs.

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