As of this writing 5:30 AM EST, here’s what we see:
US Dollar –Up at 82.800 the US Dollar is up 197 ticks and is trading at 82.800.
Energies – May Oil is up at 93.44.
Financials – The June 30 year bond is down 3 ticks and is trading at 147.29.
Indices – The June S&P 500 emini ES contract is up at 1549.25 and is 13 ticks.
Gold – The June gold contract is trading up at 1577.80 and is up 19 ticks from its close.
Quick Note: Unless otherwise shown the above contract months are now June.
Initial Conclusion: This is a nearly correlated market. The dollar is up+ and oil is up+ which is not normal but 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 up and the US dollar is trading higher which is not correlated. Gold is trading higher which is not 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 and Aussie exchange closed lower. As of this writing all of Europe is trading higher.
Possible challenges to traders today is the following
1. No Major economic news..
2. Lack of economic news.
On Friday we said our bias was neutral because the markets weren't correlated. As such we felt that the markets could be driven in any given direction. Unfortunately the all important Jobs Report did not meet expectations and came in with a net increase of 88,000 versus 198,000 expected. The Dow dropped 41 points on Friday. Today we have a nearly correlated market with the missing ingredient being the USD. If the USD were trading lower I would say we have a correlated market to the upside today. This being said our bias is to the upside today. Could this change? Of Course. Remember anything can happen in a volatile market.
Today starts earnings season with the traditional report commencing with Alcoa after the market close. Some pundits are already trying to size up this quarter with some saying it's doomsday and the other half saying how great it will be. I don't trade equities and therefore I don't have that issue. As a futures trader I concern myself with what's happening on that particular day. 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. 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 advancing. 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 91.91 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 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.
- Budget Battle to Start April 10th.
- Debt Ceiling in the May time frame.
- European Contraction - happening now
Crude oil is trading higher 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 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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