Thursday, March 7, 2013

Pre-Market Global Review - 3/7/13 - Will the ECB Decimate Rally?


This newsletter provides 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  from the Market's “tea leaves” as to what the market is doing or is likely to do.  

March 7, 2013

Good Morning Traders,

As of this writing 5:00 AM EST, here’s what we see:

US Dollar – Down at 82.595 the US Dollar is down 112 ticks and is trading at 82.595. 
Energies – April Oil is down at 90.62.
Financials – The 30 year bond is up 3 ticks and is trading at 142.30. 
Indices – The March S&P 500 emini ES contract is up at 1541.75 and is up 11 ticks.
Gold – The April gold contract is trading up at 1580.40 and is up 60 ticks from its close.
Quick Note: Unless otherwise shown the above contract months are now June.   
This is a nearly correlated market.   The dollar is down- and oil is up+  which is 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 up and the US dollar is trading lower which is correlated.  Gold is trading up which correlates with the US dollar trading lower.   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 closed mixed with the Nikkei, Sensex and Singapore exchanges closing higher and the rest of Asia closing lower.  As of this writing all of Europe is trading higher.  A note on Europe.  Today the ECB will determine the minimum bid rate or the equivalent of our Federal Funds Rate.  This is very much liken to our FOMC meetings.  At 8:30 AM EST, the ECB will hold a press conference.  The last time this happened (Feb 7th) The USD went up dramatically in a short period and drove the US markets lower.  February 7th was the last time the USD was trading in the 79 area; from that time to the present the USD has traded upwards past the 80 mark.  I would urge caution to all traders regarding this.  The last time around it turned out to be a nasty surprise.  We have no idea what Mario Draghi is going to say, but if he's says anything remotely liken to what he said last month, this could be a problem.


  Possible challenges to traders today is the following:

 -  Challenger Gray Job Cuts are out at 7:30 AM EST.  This is major.
-  ECB Minimum Bid Rate is out at 7:45 AM EST.  This is major.
-  ECB Press Conference starts at 8:30 AM EST.  This is major.
-  Trade Balance is out at 8:30 AM EST.  This is major.
-  Unemployment Claims are out at 8:30 AM EST.  This is major.
-  Revised Non-Farm Productivity is out at 8:30 AM EST.  This is not major.
-  Revised Unit Labor Costs are out at 8:30 AM EST.  This is not major.
-  Natural Gas Storage is out at 10:30 AM EST. This will move the Nat Gas market.
-  FOMC Member Powell speaks at 1:15 PM EST.  This is major.
-  Consumer Credit is out at 3 PM EST.  This is major.

Yesterday we said our bias was to the downside because the markets weren't correlated due to the USD trading higher.  The market elected to ignore this and drive the Dow 42 points higher.  Today the markets are nearly correlated with the missing ingredient being Bonds. At first glance this looks positive to the upside however the ECB is reporting today and the Smart Money hasn't taken capital off the table.  Therefore our bias today is towards the downside.  Here's why.  Last month when the ECB reported we had positive economic news and seemingly there was nothing to drive the markets lower.  However a half hour after the press conference began the USD took off and did not look back.  This forced our markets lower and the USD to this day has not traded below the 80 mark.  It could be that this press conference turns out to be a non-event but I prefer caution.  Could this change?  Of course.   Remember anything can happen in a volatile market.
The great thing about market correlation is that it gives you an insight as to what the market fundamentals are.  Now you might ask yourself "why is that important"?  It's important because markets generally tend to lean towards those fundamentals regardless of what news is being reported.  Are there exceptions?  Of course.  Look at what happened yesterday, the markets were poised to go lower but didn't.  But as a trader if you see that it changed abruptly, you can take the appropriate action.  Remember that as traders, your number one rule is to preserve your trading capital because without it there is no trading.  Her's a video on what happened yesterday:

On the political front, it appears as though President Obama decided to take some folks out to dinner.  He decided to take out the lower level members of the GOP as he knows he can't convince the main mob of Ryan, Cantor, McConnell and Boehner to see his point of view.  There is supposedly a stop gap bill in Congress that will fund the Federal Government to year end.  But that will not stop the sequester from occurring.  There will still be an 85 Billion Dollars in the Federal budget.  It is not yet known if this maneuver will do anything for the Democrats.  I suspect not, but time will tell.

Thus far Wall Street has treated this issue as if it's a famine in China, in other words so far removed that it couldn't possibly have an effect on us.  Look at what happened yesterday with the Dow going to an all time high?  Does anyone remember 2007 when that last happened?  Didn't last too long, did it?  The point that I'm trying to make is don't be so fooled into believing that "this time it will be different."  The Smart Money has been pulling that ever since there's been a market.  What goes up will come down and vice-versa.  For the time being nothing will change as it will take some time before these cuts are felt thru out the economy.  Case-in-point, today we have Unemployment Claims numbers that will probably be good.  Tomorrow is Jobs Friday and again, it will probably show a gain.  I would venture to say that that report will probably change in April unless some agreement is met in DC.   The longer this issue is present and not resolved, the worse it will be.  Remember that we still have the debt ceiling issue hanging over our heads and this won't happen until the May time frame.  Another aspect of this that we are seeing is no follow thru when it comes to fundamentals.  What I mean by this is when the markets are correlated to either the long or short side; they may take the opposite direction during the trading day but by the end of the day saner minds rule and they return to fundamentals.  They aren't doing that now.  So the markets could initially be correlated to the downside and then close higher by the end of the day, completely ignoring all fundamentals.  The Smart Money doesn't have any issue doing this but the danger to a trader is that if the Smart Money finally wakes up (and sooner or later they will) you as a trader could be stuck on the wrong side of the market.  And that will be painful.   
This is the new and improved GOP in action.  They won't outwardly hold the country hostage as they did in 2011; they'll set up events such that it works out that way.  It will be interesting to see what happens come April 15th as this is the day when either a budget is approved or Congress goes without pay.  The GOP is adamant about sticking to their guns and will not relent.  The question is what will the Democrats do? 
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 market correlation is calling for a higher open and our bias is towards the long side.  Could this change?  Of course.  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 declining.  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 crude dropped to a low of 89.55 a barrel but did not stay there.   We'll have to monitor and see if crude either goes lower or holds at the present level.   It seems that at the present time crude's support is at 90.00 with resistance at 96.00 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 March 1st.
 - Debt Ceiling in the May time frame.
 - European Contraction

Crude oil is trading higher and the US Dollar is declining.  This is 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 when the markets give us better direction.  Also be mindful of the Consumer Credit numbers 3 PM EST.  This can make afternoon trading erratic.  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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