Tuesday, March 19, 2013

Pre-Market Global Review - 3/19/13 - Cyprus Continues to Rattle Markets

Good Morning Traders,
As of this writing 6:15 AM EST, here’s what we see:
US Dollar – Up at 82.935 the US Dollar is up 36 ticks and is trading at 82.935.  
Energies – May Oil is down at 94.06.
Financials – The June 30 year bond is up 11 ticks and is trading at 143.02. 
Indices – The June S&P 500 emini ES contract is down at 1546.25 and is down 2 ticks.
Gold – The April gold contract is trading down at 1602.10 and is down 28 ticks from its close.

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


Initial Conclusion: This is a correlated market, unfortunately it is correlated to the downside.  The dollar is up+ and oil is down- which is normal and 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 down and the US dollar is trading higher which is  correlated.  Gold is trading lower which is correlated with the US dollar trading up.   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, the rest of Asia closed higher.  As of this writing all of Europe is trading lower. 

Possible challenges to traders today is the following

  1. Building Permits are out at 8:30AM EST.  This is major. 
  2. Housing Starts are out at 8:30 AM EST.  This is major.

Yesterday we said our bias was to the downside because the USD and bonds were trading higher.  The net result being that the Dow closed 62 points lower.  Today the markets are  correlated but are correlated to the downside as such our bias is to the downside.  Here's why. Most of Asia closed higher but Europe is currently trading lower.  Both the USD and Bonds are 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.

Much has been written thus far about the Cyprus bailout, especially as it concerns depositors.  I think it is fair to say that the Euro Zone and the IMF don't have too much confidence in the Cypriot government such that they felt it necessary to charge a levy on current deposit held in a Cypriot bank.  This is unprecedented in our time.  I'm still curious as to why both the Euro Zone and IMF are in essence taking this out on depositors.  If they don't have confidence in government leadership then demand a new election be held.  It wouldn't be the first time it ever happened.  Look at what happened in Greece or more recently Italy.  The Cypriot government has stated that they will review the levy percentage wise and decide by 6 PM their time as to what it should be.  That's about 11 AM EST which means that during the trading day we need to be aware that around 11 AM a decision will be made that can effect our markets and trading.    At the same time they've elected to close their banks until Thursday so as not to cause another bank run.  Of course, they're saying that "we need time to muster support for the levies"  but in reality they don't want a run on their banks.  I can only imagine what would happen if this occurred in the West.  It almost occurred in 2008 when we had the financial meltdown.  But why Cyprus?  Why do this to an island nation that doesn't have a major significance?  I suspect there's another reason.  Cyprus is the birthplace for Binary Options.  Binary Options were for the longest time considered excessive gambling.  The only thing you have to know with binary options is direction.  Long or short?  There's no real skill involved such as we have with traditional trading.  For the longest time the only place in the world where you could open an account to trade binary options was, you guessed it, Cyprus.  That has since changed.  The Nadex exchange is open in the United States and more firms are allowing trading.  As such we don't need to be concerned about identity thief issues.   What most pundits fail to realize is the Russians also stepped in to aid Cyprus.  They are allowing extended time horizons to pay back loans.  I suspect this is because the Russians have capital invested in Cyprus and don't want to run the risk of a total loss of capital.  Time will tell how this all works out but for the present time be mindful of the announcement.

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 lower open and our bias is towards the short 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 lower and the US Dollar is advancing.  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 92.13 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 92.00 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 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.  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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