Thursday, April 4, 2013

Pre-Market Global Review - 4/4/13 - ADP Report Derails Rally

Good Morning Traders,
As of this writing 5:35 AM EST, here’s what we see:
US DollarUp at 83.430 the US Dollar is up 569 ticks and is trading at 83.430
Energies – May Oil is down at 94.41.
Financials – The June 30 year bond is up 1 ticks and is trading at 145.10
Indices – The June S&P 500 emini ES contract is up at 1556.50 and is up 32 ticks.
Gold – The June gold contract is trading down at 1546.20 and is down 72 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 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 up and the US dollar is trading higher 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 Nikkei closed lower.  As of this writing Europe with the exception of London is trading higher.

Possible challenges to traders today is the following

1.  Challenger Gray Job Cuts are out at 7:30 AM EST.  This is major.
2.  ECB Minimum Bid Rate is out at 7:45 AM EST.  This is major.    

3.  ECB Press Conference starts at 8:30 AM EST.  This is major.
4.  Unemployment Claims are out at 8:30 AM EST.  This is major.
5.  FOMC Member George speaks at 8:45 AM EST.  This is not major.
6.  FOMC Chairman Bernanke speaks at 10:30 AM EST.  This is major.
7.  Natural Gas Inventory is out at 10:30 AM EST.  This will move the Nat Gas market.        

Yesterday we said our bias was neutral because the markets weren't correlated.  We also pointed out that the ADP report at 8:15 AM EST would set the tone for the trading day.  Unfortunately this was not a stellar report an as such the Dow dropped 112 points.  This is what can happen when rules of market correlation are ignored.  Our goal and objective is to keep you safe such that as a trader you keep more of your hard earned capital.   Today the markets aren't correlated to either direction therefore our bias is neutral which means it can be driven in any direction today.  We have numerous reports out today as well as Ben Bernanke speaking which can drive the markets in either direction.   Could this change? Of Course.  Remember anything can happen in a volatile market.

Yesterday we said our bias was neutral and  the Dow closed down 112 points.  So what happened?  The ADP Jobs report came out and set the tone for the trading day.  Today we have the ECB Minimum Bid Rate and if you recall last month Mario Draghi held a press conference that took everyone by surprise.  The USD shot up, the Euro went down and the US markets took a beating.  Today we have that concern plus Unemployment Claims and Ben Bernanke speaking at 10:30 AM EST.  This lends itself to a volatile session.  As a trader I would wait until the news was reported and allow the market to give us a sense of direction.

 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.  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 94.18 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 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 10:30 AM when Ben Bernanke finishes speaking and 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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