As of this writing 4:50 AM EST, here’s what we see:
US Dollar –Down at 81.920, the Sept US Dollar is down 16 ticks and is trading at 81.920.
Energies – September Oil is down at 106.27.
Financials – The September 30 year bond is down 7 ticks and is trading at 132.31.
Indices – The September S&P 500 emini ES contract is up at 1702.75 and is up 1 tick.
Gold – The August gold contract is trading down at 1290.20 and is down 120 ticks from its close.
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 up and the US dollar is trading lower which is correlated. Gold is trading lower which is not 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.
Asia closed mixed with half the exchanges closing lower and the other half higher. As of this writing Europe is trading mixed.
Possible challenges to traders today is the following
1. Trade Balance is out at 8:30 AM EST. This is major.
2. JOLTS Job Openings is out at 10 AM EST. This is not major.
3. IBD TIPP Optimism is out at 10 AM EST. This is not major.
4. FOMC Member Evans Speaks at 1 PM EST. This is major.
Currencies As a follow up to what happened yesterday with the Aussie Dollar, suffice it to say that the Aussie went up after the 10 AM ISM non- Manufacturing number. The Canadian dollar also went up in value as well. A few nuances that you should be aware concerning the CDN are the Canadians as a general rule try to keep their dollar as closely correlated to the USD as possible. The reason for this is because when the Canadians attempt to initiate a foreign trade they must do so using US dollars. Hence it is in their best interest to keep the two as closely correlated as possible. The CDN usually makes a move either long or short at around 9 AM EST but the CDN doesn't make major moves (unless there's something dramatic happening like Jobs Friday) but rather makes consistent moves around the same time each day. Generally it may advance or decline by no more than 20-30 ticks. This could change of course, but generally speaking that's the move. If you're trading one contract this means that you need to watch the move and should it start to decline in value from your entry, take the appropriate action.
|Chart Courtesy of Trend Following Trades|
It would appear as though the foreign markets didn't buy the Jobs numbers either as Asia's major exchange (the Nikkei) lost 208 points Sunday night. The European exchanges opened higher and for part of the morning yesterday remained higher but then lost ground. We thought that perhaps the positive ISM number might have helped but to no avail. It's interesting because I thought on Friday that the markets might have closed lower due to the Jobs report but I guess the Smart Money wanted to go into the weekend on a high note. Unfortunately yesterday that note turned sour as they elected to take money off the table. Could it have been due to the terror alert issued by the State Department over the weekend? Possibly. Of course, shutting down embassies worldwide didn't help. When there's any clue of a geopolitical event occurring, you can rest assured that the Smart Money will take capital off the table as it's the safe option...
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 to the downside. 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 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 September crude dropped to a low of 106.45 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 $105 a barrel and resistance at 110. 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 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 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.