As of this writing 4:40 AM EST, here’s what we see:
US Dollar –Down at 81.850, the Sept US Dollar is down 69 ticks and is trading at 81.850.
Energies – September Oil is up at 103.55.
Financials – The September 30 year bond is down 9 ticks and is trading at 133.20.
Indices – The September S&P 500 emini ES contract is up at 1686.50 and is up 7 ticks.
Gold – The August gold contract is trading up at 1332.80 and is up 88 ticks from its close.
Initial Conclusion: Finally a correlated market and correlated to the upside. The dollar is down- and oil is up+ which is 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 up and the US dollar is trading lower which is correlated. Gold is trading higher which is correlated with the US dollar trading down. 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 lower with the exception of the Shanghai which closed higher. As of this writing Europe is trading mixed.
Possible challenges to traders today is the following
1. ADP Non-Farm Employment Change is out at 8:15 AM EST. This is major.
2. Advance GDP is out at 8:30 AM EST. This is major.
3. Advance GDP Price Index is out at 8:30 AM EST. This is not major.
4. Employment Cost Index is out at 8:30 AM EST. This is not major.
5. Chicago PMI is out at 9:45 AM EST. This is major.
6. Crude Oil inventory is out at 10:30 AM EST. This will move the oil market.
7. FOMC Statement is out at 2 PM EST. This is major.
8. Federal Funds Rate is out at 2 PM EST. This is major.
Currencies As a follow up to what happened yesterday on the Aussie Dollar. We said that a move would occur probably around 9 AM EST as we had Consumer Confidence at 10 AM EST. A move did occur around that time frame but it was to the downside. The chart below shows a blue arrow for the downside move. At no point did the AUD show any strength for an upside move. Today we have major news out at 8:30 AM EST so the same rule applies. We believe the AUD will make a move (either long or short) probably around 9 AM EST. Time will tell if we are correct in this regard and as usual we'll have to monitor and see.
Chart Courtesy of Trend Following Trades
Yesterday we said our bias was neutral as we felt the market could go in any direction. True to form that's pretty much what happened. The market was all over the place and was trend-less. As such the Dow closed down by 1 point. Today the markets are correlated to the upside however today is FOMC Day and as many of my followers know, I don't trade on FOMC Day as historically speaking the market has never shown any sense of normalcy on this day. As such our bias is neutral. The good news is there's no press conference scheduled so the Fed can't drive the markets down via their comments. Could this change? Of Course. Remember anything can happen in a volatile market.
The question now is what will the Fed do? After the fireworks from the last FOMC meeting, I don't think they're going to do anything. They certainly won't raise the Federal Funds Rate nor will they say anything regarding tapering but again we'll have to see...
Many of my readers have been asking me to spell out the rules of Market Correlation. Today Futures Magazine has elected to print a story on the subject matter and I must say I'm proud of the fact that they did as I'm Author of that article. I encourage all viewers to read that piece as it spells out the rules of market correlation and provides charts that show how it works in action. The article is entitled "How to Exploit and Profit from Market Correlation" and can be viewed at:
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.
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
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 September crude dropped to a low of 102.67 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 $102.50 a barrel and resistance at 106. 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 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 10:30 AM when the inventory 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.
Nick Mastrandrea is the author of Market Tea Leaves. Market Tea Leaves is a free, daily newsletter that discuses and teaches market correlation. Market Tea Leaves is published daily, pre-market in the United States and can be viewed at www.markettealeaves.com Interested in Market Correlation? Want to learn more? Signup and receive Market Tea Leaves each day prior to market open. As a subscriber, you’ll also receive our daily Market Bias video that is only available to subscribers.