Thursday, March 28, 2013

Pre-Market Global Review - Is Window Dressing Alive and Well?

Good Morning Traders,
As of this writing 6:15 AM EST, here’s what we see:
US DollarDown at 83.350 the US Dollar is down 61 ticks and is trading at 83.350.  
Energies – May Oil is up at 96.64.
Financials – The June 30 year bond is up 8 ticks and is trading at 144.26
Indices – The June S&P 500 emini ES contract is down at 1553.25 and is down 14 ticks.
Gold – The April gold contract is trading down at 1603.90 and is down 23 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 down and the US dollar is trading lower which is not 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. 

Asia with the exception of the Indian Sensex closed lower.  As of this writing Europe is trading mixed with e Paris CAC trading lower. 

Possible challenges to traders today is the following

1.  Unemployment Claims are out at 8:30 AM EST.  This is major.
2.  Final GDP is out at 8:30 AM EST.  This is major.

3.  Final GDP Price Index is out at 8:30 AM EST.  This is major.
4.  Chicago PMI is out at 9:45 AM EST.  This is major.
5.  Natural Gas Inventory is out at 10:30 AM EST.  This will move the Nat Gas market. 

Yesterday we said our bias was to the short side because the markets were correlated to the downside.  The net result being that the Dow closed 34 points lower after spending all day in negative territory.  Today we have a different situation.  The markets aren't correlated and therefore our bias is neutral.  In other words could be driven in any direction today.  We do have economic news that can set the direction but that is yet to be seen.  Could this change? Of Course.  Remember anything can happen in a volatile market.

Today is in effect the last trading day of the 1st quarter of 2013 and it struck as odd that we used to have a phenomena called window dressing in the United States.  This was the situation whereby institutional investor would speculate on the shares in their mutual funds to prop up the prices of those shares and hence have a positive quarter.  I've not seen this phenomena in quite some time.  I do think this past December we saw some of it until the fiscal cliff issue took center stage but prior to that, we haven't.  I suspect the reason for this is because in today's world everyday could be construed as window dressing.  With the advent of HFT and Algo trading, the machines (robots) are deciding where a stock should go (up/down,etc.).  This is why monitoring order flow is essential.  True, we could have a geopolitical situation that is driving the market is any one direction (look at what happened in Cyprus) but that notwithstanding; on an ordinary day it's the HFT's and Algo that rule.  As a trader you need to be watching what they're doing and follow the bots, so to speak.

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 neutral because the markets aren't correlated.  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 95.58 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 93.00 with resistance at 98.00 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.

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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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