Friday, March 22, 2013

Pre-Market Global Review - Cyprus Conundrum Continues

Good Morning Traders,
As of this writing 5:50 AM EST, here’s what we see:
US DollarDown at 82.815 the US Dollar is down 90 ticks and is trading at 82.815.  
Energies – May Oil is up at 92.67.
Financials – The June 30 year bond is up 17 ticks and is trading at 143.27
Indices – The June S&P 500 emini ES contract is up at 1539.50 and is up 2 ticks.
Gold – The April gold contract is trading down at 1612.20 and is down 16 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 fractionally and the US dollar is trading lower which is correlated.  Gold is trading lower which is not correlated with the US dollar trading down.   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 Shanghai , all of Asia closed lower.  As of this writing all of Europe is trading lower. 

Possible challenges to traders today is the following

1.  No major economic news.
2.  Lack of economic news.

Yesterday we said our bias was to the  short side because the markets weren't correlated.  The  net result being that the Dow closed 91 points lower.  Today the markets are not correlated with the missing ingredients being Bonds and Gold.  It would appear that the Cyprus Conundrum has taken center stage again.  As such our bias  today is to the short side.  Here's why.  Asia closed lower (with the exception of Shanghai) and Europe is currently trading lower.  The USD is lower but the Bonds are trading higher.  Events in Cyprus are taking center stage and there are no major economic news to propel the markets forward.  Could this change? Of Course.  Remember anything can happen in a volatile market.

After a one day reprieve due to the FOMC meeting on Wednesday it appears as though the markets are squarely focused on Cyprus again.  The latest news is that their Finance Minister went to Russia to see if a deal could be negotiated.  He could not do this.  On Tuesday afternoon shortly before the close of trading in the United States an announcement was made that the ECB would provide Cyprus with full liquidity.  It turns out that it will be full liquidity within limits.  Now the ECB has given Cyprus what is tantamount to an ultimatum: either strike a deal with the EU and IMF or else.  This is not going to make the Cypriot government look good in the eyes of its people and I suspect that this government will resign and a new election will be held.  The question who would want that job?  A new government would have to do a major sales job on its people to sell this.  On Tuesday you reject the bank levy and now you advocate it?  The only other recourse would be for Cyprus to withdraw from the EU but then what would they use for currency?  The Greek drachma?  I don't think so.  The existing government is clearly incompetent.  They make statements and assumptions without even checking first.  I personally think the Marx Brothers could do a better job. One thing is certain, the longer this conundrum exists the worse it will be for the markets in general.  We need closure.

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 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 91.84 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 91.00 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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