Wednesday, March 27, 2013

Pre-Market Global Review - Cyprus Safe? ...for now

Good Morning Traders,
As of this writing 6:05 AM EST, here’s what we see:
US DollarUp at 83.275 the US Dollar is up 227 ticks and is trading at 83.275.  
Energies – May Oil is down at 95.89.
Financials – The June 30 year bond is up 14 ticks and is trading at 144.04
Indices – The June S&P 500 emini ES contract is down at 1553.75 and is down 15 ticks.
Gold – The April gold contract is trading down at 1593.60 and is down 21 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's correlated to the short side.  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. 

All of Asia closed higher.  As of this writing all of Europe is trading lower. 

Possible challenges to traders today is the following

1.  Pending Home Sales are out at 10 AM EST.  This is major.
2.  Crude Oil Inventories are out at 10:30 AM EST.  This will move the crude market.

3.  FOMC Member Evans speaks at 11 AM EST.  This could move the markets.
4.  FOMC Member Rosengren speaks at 11:30 AM EST.  This could move the markets.

Yesterday we said our bias was neutral because we felt that the market could be driven in any direction.  In other words the fundamentals weren't clear.  Well we had good news from the housing market in terms of home prices and this served as a catalyst to drive the Dow 112 points higher.  The S&P came within a point or two of an all time high.  Today we have a different situation, The markets are correlated but they are correlated to the short side hence our bias is to the short side today.  Could this change? Of Course.  Remember anything can happen in a volatile market.

Yesterday apparently the markets worldwide was ready to shake off any bad news from Cyprus.  On Monday the Cypriot government reached an accord with the troika to levy a tax on any bank account that has over 100,000 Euros but to date they haven't committed to what that rate is.  I've heard as high as 30% but can't commit to that either.  One thing is known, the banks in Cyprus are closed until Thursday at the earliest.  I would suspect that they will have a major bank run on them.  If this is the case the Cypriot government may be forced to go back to the troika and ask for more money, but we'll have to see how events unfold.

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 our bias is to the short side because the markets are correlated to the downside.  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 94.79 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 97.00 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 advancing.  This is not 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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