Wednesday, September 4, 2013

Pre-Market Global Review - 9/4/13 - Post Holiday Euphoria Moves Markets

Good Morning Traders,
As of this writing 5:15 AM EST, here’s what we see:
US Dollar –Down at 82.340, the Sept US Dollar is down 61 ticks and is trading at 82.340.             
Energies – October Oil is down at 108.06.        
Financials – The September 30 year bond is down 8 ticks and is trading at 131.15      
Indices – The September S&P 500 emini ES contract is down at 1638.00 and is down 4 ticks.  
Gold – The October gold contract is trading down at 1403.50 and is down 82 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 down and the US dollar is trading higher which is not 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 mainly higher with the exception being the Hang Seng and the Singapore exchanges.  As of this writing all of  Europe is trading lower. 
Possible challenges to traders today is the following                                   

1.  Challenger Job Cuts are out at 7:30 AM EST.  This is major.       
2.  Trade Balance is out at 8:30 AM EST.  This is major.    
3.  IBD/TIPP Economic Optimism is out at 10 AM EST.  This is not major.  
4.  Total Vehicle Sales - All Day.      
5.  Beige Book is out at 2 PM EST.  This is major.
Currencies  Yesterday the Swiss Franc made it's move at around 10 AM after the ISM Manufacturing PMI showed strong growth for the manufacturing sector.   Interestingly enough if you follow what we teach in terms of Market Correlation and compare the Swiss Franc to the USD, you would notice that at around 10 AM the USD hit a high and proceeded to depreciate in value.  This is what our friend Gavin Holmes would call a "Yao Ming" bar because it is so high.  The Swiss Franc on the hand gained in value at around that same time proving correlation.   As a trader you could have netted 20 ticks on this trade.  The moral of the story is whenever you see a super high bar as shown, you have to have to know that it will go down.

Chart Courtesy of Trend Following Trades

USD 9/3/13


Yesterday we said our bias was to the upside as historically speaking the markets rise after a 3 day holiday weekend.  Well the markets didn't disappoint as the Dow gained 24 points and the other indices rose as well.  Today we aren't dealing with a correlated market however our bias is to the upside.  Why?  Both the USD and the Bonds are trading lower and this is bullish for the markets and indices, whereas the index futures are currently lower; they are fractionally lower which means this could change as the morning wears on.   Could this change? Of Course.  Remember anything can happen in a volatile market.

Traders in the US have had a couple of days to see how the global markets would react if the US were to initiate military action in Syria.  They saw the Asian markets rise on Sunday night, the European markets rise on Monday and I suspect that after what happened last week they were chomping at the bit to put capital on the table.  It appears that yesterday Syria took a backseat to economic news as the ISM Manufacturing PMI number came in far better than expected as did Construction Spending.  The PMI number came in at 55.7 and any number over 50 suggests growth; but when you exceed what's expected (54.2) that's better yet.  I have no doubt that the Syria situation will regain center stage but at this point we know what the intent is.  We don't know when it will occur as Congress won't reconvene until September 9th (next Monday), at which point we'll have to sit back and watch the fireworks erupt and they'll be plenty to go around.  I suspect that once it's known when this will occur, we'll probably see the markets go higher, at this point we'll have to take day-by-day...

Many of my readers have been asking me to spell out the rules of Market Correlation.  Recently 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 a follow up to the first article on Market Correlation, I've produced a second segment on this subject matter and Futures Magazine has elected to publish it.  It 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 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:

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 October crude dropped to a low of 106.00 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 $107.70 a barrel and resistance at 109.26.  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:
- Budget Battle - ongoing.
- Debt Ceiling in the September time frame.      
- Military Action in Syria - September. 

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  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.