As of this writing 5:20 AM EST, here’s what we see:
US Dollar – Down at 83.085 the US Dollar is down 90 ticks and is trading at 83.085.
Energies – May Oil is down at 96.74.
Financials – The June 30 year bond is down 3 ticks and is trading at 144.12.
Indices – The June S&P 500 emini ES contract is down at 1560.00 and is down 11 ticks.
Gold – The April gold contract is trading up at 1592.20 and is up 24 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 down- which is not normal and 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 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. Europe is closed for the Easter Monday Bank Holiday.
Possible challenges to traders today is the following
1. Final Manufacturing PMI is out at 9 AM EST. This is major.
2. ISM Manufacturing PMI is out at 10 AM EST. This is major.
3. Construction Spending is out at 10 AM EST. This is major.
4. ISM Manufacturing Prices are out at 10 AM EST. This is major.
On Thursday we said our bias was neutral because the markets weren't correlated yet we had major economic news that could drive the markets in any direction. Today we aren't dealing with a correlated market but do have economic news that can set the direction. Historically speaking the US markets tend to advance after a 3 day holiday, hence our bias is to the long side side today. Could this change? Of Course. Remember anything can happen in a volatile market.
Today is Easter Monday in Europe and hence the markets are closed. In the US we do have major economic news so the focus will be on that news as no European market to piggy back off of. The US markets historically tend to advance after a holiday as there is pent-up demand in the markets due to that holiday. The United States is behind the rest of the world when it comes to holidays and granting employees paid time off. Today it takes an act of Congress to create a holiday there are no laws that mandate how much vacation time is allowed. Typically employers in the US provide two weeks as usual and customary but there is no law that the employees must be paid for it. I know employers that only grant 1 week of paid time off after a year. In pre-20th Century America the idea was that in order for the US to maintain it's competitive edge in the world markets, US factories and stores would be open on what is considered a traditional holiday. What would anyone say about that "competitive edge" today? I once worked for a German owned software company that provided 6 weeks of vacation and about a month of paid holidays. Shocking here but who can dispute Germany's productivity?
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 upside because of a holiday. 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 declining. This is not 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 96.26 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.
- 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 declining. 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.
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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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