Thursday, March 21, 2013

Pre-Market Global Review - FOMC Moves Markets..momentarily

Good Morning Traders,
As of this writing 5:30 AM EST, here’s what we see:
US DollarUp at 83.025 the US Dollar is up 77 ticks and is trading at 83.025.  
Energies – May Oil is down at 92.97.
Financials – The June 30 year bond is down 7 ticks and is trading at 142.29
Indices – The June S&P 500 emini ES contract is down at 1547.75 and is down 5 ticks.
Gold – The April gold contract is trading up at 1607.80 and is up 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 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 down and the US dollar is trading higher which is correlated.  Gold is trading higher which is not 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. 

Asia closed mixed with the Hang Seng and Sensex exchanges closing lower and the rest of Asia closing higher.  As of this writing all of Europe is trading lower. 

Possible challenges to traders today is the following

1.  Unemployment Claims are out at 8:30 AM EST.  This is major.
2.  Flash Manufacturing PMI is out at 8:30 AM EST.  This is not major.
3.  HPI is out at 8:30 AM EST.  This is not major.
4.  Existing Home Sales are out at 10 AM EST.  This is major.
5.  Philly Fed Manufacturing Index is out at 10 AM EST.  This is major. 

6.  CB Leading Index is out at 10 AM EST.  This is not major.
7.  Natural Gas storage is out at 10:30 AM EST.  This will move the Nat Gas market. 

Yesterday we said our bias was to the upside because the USD and bonds were trading lower.  The  net result being that the Dow closed 56 points higher.  Today the markets are not correlated with the missing ingredients being Bonds and Gold.  It would appear that after a 1 day reprieve (due to FOMC) the markets are focused on Cyprus (again).  As such our bias  today is to the short side.  Here's why.  Asia closed mixed but Europe is currently trading lower.  The USD is higher and Bonds are trading lower.  Events in Cyprus are taking center stageCould this change? Of Course.  Remember anything can happen in a volatile market.

Well FOMC Day came and went and like clockwork, the Fed didn't change a thing.  They left the FFR where it is currently and reaffirmed their commitment to easing.  This lifted the markets and even Europe traded higher despite the Cyprus conundrum.  Domestically speaking the US now needs to focus on the looming budget battle.  Yesterday a bill passed teh Senate to extend funding for the Federal government until late September.  This now has to go to the House of Representatives where it will be voted on today.  The question is will the GOP dominated House approve this bill or will they stick to their ideology and shoot it down?  We'll soon see.

It also appears that after a 1 day reprieve due to the FOMC meeting, the news from Cyprus is taking center stage.  On Tuesday their government decided to shoot down the notion of a levy tax on depositors money in their banks.  On Tuesday afternoon an announcement was made that the ECB will provide Cyprus with full liquidity.  We already knew that their banks and stock market was closed until Thursday (today).  At 5 AM EST this morning the ECB made an announcement that said emergency funding for Cyprus will be cut off by Monday, March 25th unless Cyprus comes to terms with the European Union and the IMF.  Ironically enough the banks in Cyprus will be on "holiday" until Monday as well as their stock market.  I've written an article published by that details this.  It can be viewed at

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 92.55 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.

To view previous issues of Market Tea Leaves visit our archive.