As of this writing 5:05 AM EST, here’s what we see:
US Dollar –Up at 80.925, the Sept US Dollar is up 80 ticks and is trading at 80.925.
Energies – July Oil is up at 98.30.
Financials – The September 30 year bond is down 1 tick and is trading at 140.10.
Indices – The June S&P 500 emini ES contract is up at 1631.50 and is up 52 ticks.
Gold – The August gold contract is trading down at 1386.20 and is down 14 ticks from its close.
Initial Conclusion: This is not a 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 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 with the exception of the Shanghai exchange which closed fractionally lower. As of this writing all of Europe is trading up.
Possible challenges to traders today is the following
1. Empire State Manufacturing Index is out at 8:30 AM EST. This is major.
2. NAHB Housing Market Index is out at 10 AM EST. This is major.
3. G8 Meeting starts today.
On Friday we said our bias was neutral as we had a number of major reports due that we felt could drive the markets in any direction. The net result? The Dow dropped 106 points and the other indices dropped as well. Today we are not dealing with a correlated market however our bias is to the upside. Why? Asia closed higher and Europe is currently trading higher. The Bonds are staring to trade lower which is bullish for the markets and indices. Could this change? Of Course. Remember anything can happen in a volatile market.
On Friday we said our bias was neutral, however subscribers to Market Tea Leaves who listened to our Market Bias video heard me say that ordinarily I say our bias is to the downside but because we had major economic reports that could serve to drive the markets in any direction. Well the economic reports came and went and they weren't too stellar. PPI came in higher and the talking heads will have you believe that this is positive. It isn't positive because it means that Producers (aka manufacturers) are paying more money for raw materials and components. Guess what? Eventually consumers may be paying for that hike. Current Account came in better than expected which is good for the government as it shows austerity is working from a fiscal point of view. However TIC purchases are down, capacity utilization down, industrial production flat, consumer sentiment down, consumer inflation expectation higher. This is not good for an economy whose main source of GDP is consumer spending. 70% of the US economy is driven by consumer spending and these reports do not bode well for that. So on one hand the folks in DC will state "see, it's working; we're spending less" but what they haven't quite figured out yet is that this austerity policy will also stump growth and growth is what's needed. Of course they'll also state "well look at the job growth figures, we've created more jobs than expected last month." Oh really? Is that why the unemployment rate increased last month? If that were the case it should have decreased. Even the IMF has stated that the US economy is in danger of falling back into a downturn. Now I'm not stating that this will occur nor do I know that but I'm wondering when the folks in DC are going to wake up and realize that this economy needs to grow and not by a paltry 2 percent annually. It needs to grow by 5% or greater to resolve many of the economic issues we face. Lets face it; many of the issues we have: balanced budget, tax revenues (or lack thereof), job creation, etc. would be solved by a growing economy. I think we need a forward thinking group of folks in DC to realize that...
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.
In May, I spoke with John Karnas, CEO of Trend Following Trades. John has an interesting background as he was a trader for a number of years prior to buying Trend Following Trades. John is a believer in Trading Plans and has a very precise method of developing aspiring traders. To download the article I've written, go to:
My discussion with John can be viewed at: http://youtu.be/uVwHpMq1604
In April I had the opportunity to interview Mr. Dan Cook, Director of Business Development for Nadex.com Nadex is an exchange that is devoted solely to binary options. Recently there's been quite a bit of misinformation regarding Binary Options and how they work. Some have even speculated that opening a Binary Option trading account is the same as identity theft. My objective is to dispel these myths and to alert the retail trader as to what a binary option is, how to trade them, how to amend an order and how to exit a trade for profit. Nadex is a Chicago based exchange that abides by the rules of CFTC. I've created an eBook that will discuss and show how a trader can capitalize on this innovative instrument. This is an 8 page eBook loaded with charts, diagrams etc. Each chart/diagram shown has been approved by Nadex and has gone thru their compliance department. When last I heard compliance departments for exchanges are tough when it comes to misrepresentation. Feel free to download and to share with those you know. It's time we saw some innovation.... To View and Download this article, go to:
My interview with Dan can be viewed at:
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. On Friday August crude dropped to a low of 96.42 a barrel and held. We'll have to monitor and see if crude either goes lower or holds at the present level. It would appear at the present time that crude has support at 96.11 a barrel and resistance at 99.55. 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 - ongoing.
- Debt Ceiling in the August time frame.
- Asian Contagion - happening now
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 economic numbers are released 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 editions.