As of this writing 5:25 AM EST, here’s what we see:
US Dollar –Up at 82.305, the Sept US Dollar is up 100 ticks and is trading at 82.305.
Energies – October Oil is up at 107.86.
Financials – The December 30 year bond is down 12 ticks and is trading at 129.17
Indices – The September S&P 500 emini ES contract is down at 1652.75 and is down 3 ticks.
Gold – The October gold contract is trading up at 1390.20 and is up 6 ticks from its close.
Initial Conclusion: This is not a correlated market. The dollar is up+ and oil is up+ 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 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 closed mainly higher with the exception being the Shanghai exchange. As of this writing all of Europe is trading mainly higher with the exception being the German Dax which is fractionally lower.
Possible challenges to traders today is the following
1. Challenger Job Cuts are out at 7:30 AM EST. This is major.
2. ADP Non-Farm Employment Change is out at 8:15 AM EST. This is major.
3. Unemployment Claims are out at 8:30 AM EST. This is major.
4. Revised Non-farm Productivity q/q is out at 8:30 AM EST. This is not major.
5. Revised Unit Labor Costs is out at 8:30 AM EST. This is not major
6. ISM Non-Manufacturing PMI is out at 10 AM EST. This is major.
7. Factory Orders are out at 10 AM EST. This is major.
8. Natural Gas Storage is out at 10:30 AM EST. This will move the Nat Gas market.
9. Crude Oil Inventories are out at 11 AM EST. This will move the crude market.
Also worthy of note:
- ECB Minimum Bid Rate is out at 7:45 AM EST
- ECB Press Conference starts at 8:30 AM EST
Yesterday
the Swiss Franc made it's move at around 10:30 AM after GM reported the best month in sales since September, 2008.
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;30 AM the USD hit a high and
proceeded to depreciate in value. The Swiss Franc on
the hand gained in value
at around
that same
time proving correlation.
As a trader you could
have netted 20-30 ticks on this trade.
 |
| Chart Courtesy of Trend Following Trades |
 |
| USD 9/4/13 |
Bias
Yesterday we said our bias was to the upside as both the USD and the Bonds were trading lower. Well the markets didn't disappoint as the Dow gained 97 points and the other indices rose as well. Today we are not dealing with a correlated market and our bias is neutral. Why? At first glance it would appear as though the markets are poised to go higher as the Bonds are lower and Gold is starting to go higher however another factor that comes into are the economic reports. Today we have a virtual boatload of economic reports. Just for teh US markets there are 7 economic reports, 6 of which are major and can move the markets in any direction today. This does not include the European markets which could also have an impact on the US. Could this change? Of Course. Remember anything can happen in a volatile market.
Yesterday the markets started off slowly and in fact moved down after the opening bell. The economic news wasn't too stellar either with the US Trade Balance off by 13%. Then shortly after 10 AM GM reported auto sales for August that were the best since September, 2008 and the markets didn't look back. Well let's consider this for a moment. People are replacing their every 4-5 years, if they lease their vehicles they have to make a go no-go decision meaning either you buy the vehicle or you give it back and get a new one. In an age of low interest rates, what would you do? Probably get a new one. This is the case for keeping interest rates low and not tapering sooner as opposed to later. On the political front the Senate Foreign Relations Committee approved a resolution to allow President Obama to utilize military action in Syria. This resolution was approved 10-7 however understand that until Congress is back in session, this vote unto itself doesn't do anything. The Senate and the House will have to approve that next week when they reconvene. So what we have is an approval from a committee that says "it's OK" but we have no idea as to when a military confrontation will occur. But as we said yesterday we'll have to take it 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:
http://www.futuresmag.com/2013/08/01/how-to-exploit-and-profit-from-market-correlation
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:
http://www.futuresmag.com/2013/08/16/how-to-exploit-and-profit-from-market-correlation?ref=hp
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:
https://markettealeaves.sharefile.com/d/s0e8e37fe5944fc79
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 October crude dropped to a low of 106.79 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 $106.32 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 11 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.
Recently Published Articles:
http://www.barchart.com/headlines/story/10598425/when-perception-becomes-reality
http://www.barchart.com/headlines/story/12241621/syria-turmoil-stirs-markets
http://www.forexcrunch.com/leadership-or-lack-thereof-part-ii/
http://www.traderslog.com/john-karnas/
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.
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