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 8, 2013
Good Morning Traders,
As of this writing 5:00 AM EST, here’s what we see:
US Dollar – Up at 82.490 the US Dollar is up 175 ticks and is trading at 82.490.
Energies – April Oil is down at 91.54.
Financials – The 30 year bond is down 4 ticks and is trading at 141.27.
Indices – The March S&P 500 emini ES contract is up at 1546.75 and is up 16 ticks.
Gold – The April gold contract is trading up at 1579.00 and is up 39 ticks from its close.
Quick Note: Unless otherwise shown the above contract months are now June.
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 up and the US dollar is trading higher which is not correlated. Gold is trading up which is not correlated 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 Shanghai and Singapore, the rest of Asia closed higher. As of this writing all of Europe is trading higher. It would appear as though the ECB did not damage the USD by driving it higher yesterday. It seems as though they already reaped the reward of a lower Euro this past month, currently the Euro is trading at 1.31040 and a month ago it was upwards past the 1.34000 range.
Possible challenges to traders today is the following:
- Non-Farm Employment Change is out at 8:30 AM EST. This is major.
- Unemployment Rate is out at 8:30 AM EST. This is major.
- Average Hourly Earnings are out at 8:30 AM EST. This is major.
- Wholesale Inventories are out at 10 AM. This is not considered major.
Yesterday we said our bias was to the downside because the markets weren't correlated due to the Bonds trading higher. The market elected to ignore this and drive the Dow 33 points higher. Today the markets are not correlated with the missing ingredient being Bonds, again. Will either the Bonds or the USD correct itself before the trading session begins? Difficult to say as today we have Jobs Friday. As such our bias is neutral. I personally don't trade Jobs Friday as historically speaking the markets don't behave with any sense of normalcy on this day. Could this change? Of course. Remember anything can happen in a volatile market.
On the political front, it appears as though some members of the GOP that the President took out to dinner on Wednesday are starting to say that they weren't aware that President Obama has already cut 1.4 Trillion dollars from the budget, thereby reducing the deficit. Apparently none of the leaders of their own party bothered to tell them and if the only thing they hear is GOP propaganda, what do they believe? This amounts to open communication and quite frankly this is something I have to blame the President for. He had every opportunity to do this during his first term but decided not to. He now knows that if wants a truly historical legacy that he must meet with his opponents and have a one-on-one talk with them, at least to communicate what he doing and explain his point of view. Surprisingly yesterday he met with Paul Ryan for lunch. Yes, the same Paul Ryan who just ran against him and collectively they may to an agreement regarding the future of Medicare.
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 Jobs Friday and 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.
- Sequester spending cuts to commence March 1st.
- Debt Ceiling in the May time frame.
- European Contraction
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 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. 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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