Friday, March 15, 2013

Pre-Market Global Review - 3/15/13 - Quadruple Witching Friday

Good Morning Traders,
As of this writing 4:45 AM EST, here’s what we see:
US DollarDown at 82.720 the US Dollar is down 143 ticks and is trading at 82.720.
EnergiesMay Oil is up fractionally at 93.41.
Financials – The June 30 year bond is up 6 ticks and is trading at 141.16
Indices – The June S&P 500 emini ES contract is down at 1555.00 and is down 4 ticks.
Gold – The April gold contract is trading down at 1590.40 and is down 3 ticks from its close.

Quick Note: Unless otherwise shown the above contract months are now June.   

Initial Conclusion: This is not a 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 higher which is not correlated.  Gold is trading down which is not correlated 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. 

With the exception of the Hang Seng and Sensex exchanges, Asia closed higher.  As of this writing all of Europe is trading lower.  

Possible challenges to traders today is the following

  1. Core CPI is out at 8:30 AM EST.  This is major. 
  2. CPI is out at 8:30 AM EST.  This is major.
  3. Empire State Manufacturing Index is out at 8:30 AM EST.  This is major
  4. TIC Long Term Purchases are out at 9 AM EST.  This is not major.
  5. Capacity Utilization Rate is out at 9:15 AM EST.  This is not major.
  6. Industrial Production Rate is out at 9:15 AM EST.  This is not major.
  7. Preliminary UOM Consumer Sentiment is out at 9:55 AM EST.  This is major. 
  8. Preliminary UOM Inflation Expectations are out at 9:55 AM EST.  This is major.

Yesterday we said our bias was to the upside.  The net result being that the Dow 84 points higher.  Today the markets are not correlated and as such our bias is to the downside.  Here's why.  Asia closed mainly higher but Europe is currently trading lower.  Whereas the USD is currently trading lower, the Bond market is trading higher.  When bonds are higher, this is bearish for the indices.  Could this change?  Of course.   Remember anything can happen in a volatile market.


Today we'll focus on the markets.  The political front is dominated by the events of the CPAC conference with one member talking about the Vietnam War.  Did anyone bother to tell him that we're in the 21st century?  Today we have quadruple witching Friday which is an even that occurs 4 times a year.  Each month on the third Friday of the month, we have options expiration which simply means that the current month contract rolls over to next month.  Quadruple Witching means that 4 types of financial instruments will rollover, namely:
 - Market Index Futures
 - Market Index Options
 - Stock Options 
 - Stock Futures
Prior to 2002 it was called Triple Witching but in that year the advent of Single Stock Futures became a reality and therefore it became Quadruple Witching Friday.  The bottom line here is that on any given month options expiration is considered volatile.  On Quadruple Witching Friday it is increased volatility.  The price of the expiring contract usually falls off and the price of new or forward month spikes in value.  This is typically a short lived phenomena as the prices quickly reverse and come down to a more realistic amount.  From a trading point of view this is where the volatility comes into play  as a trader could be lured into thinking that the prices really are increasing.  So be careful if trading.

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 92.01 a barrel and held.   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.  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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