As of this writing 6:15 AM EST, here’s what we see:
US Dollar –Down at 82.585, the Sept US Dollar is down 83 ticks and is trading at 82.585.
Energies – October Oil is up at 108.61.
Financials – The December 30 year bond is up 8 ticks and is trading at 128.30
Indices – The September S&P 500 emini ES contract is down at 1652.25 and is down 3 ticks.
Gold – The October gold contract is trading down at 1368.80 and is down 38 ticks from its close.
Initial Conclusion: This is not a correlated market. The dollar is down and oil is up+ which is normal but the 30 year bond is trading higher. 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 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 Nikkei exchange. As of this writing all of Europe is trading lower.
Possible challenges to traders today is the following
1. FOMC Member Evans Speaks at 8 AM EST. This is major.
2. Non-Farm Employment Change is out at 8:30 AM EST. This is major.
3. Unemployment rate is out at 8:30 AM EST. This is major.
4. Average Hourly Earnings m/m is out at 8:30 AM EST. This is not major.
5. FOMC Member George Speaks at 1:30 PM EST. This is major
Yesterday the Swiss Franc made it's move at around 10 AM after ISM non-Manufacturing PMI was released. 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 9:40 AM the Swiss Franc hit a high and proceeded to depreciate in value. The USD on the hand gained in value at around that same time proving correlation. Then the report came out at 10 AM and things really took off. As a trader you could have netted 20-30 ticks on this trade.
|Chart Courtesy of Trend Following Trades|
|USD - 9/5/13|
Yesterday we said our bias was neutral as we felt there was a boatload of economic reports due out and the markets could be driven in any direction. Now in my Market Bias video I stated that whereas the market might appear positive, there are far too many reports out. Well the Dow gained 6 points and the other indices gained fractionally as well. Today is Jobs Friday and historically speaking I don't trade this day as the markets have never shown any sense of normalcy. Therefore our bias is neutral. Could this change? Of Course. Remember anything can happen in a volatile market.
Yesterday we had a virtual tsunami of economic reports but I guess that's what happens when you have a holiday at the beginning of the week. Everything gets pushed into the latter part of the week. Even though the markets ended in positive territory, it was quite choppy as it came very close to going into negative territory but didn't. I attended a webinar with two legends of the trading world and they couldn't find anything to rave about either. Today we have the monthly jobs report and many pundits are already claiming that this is "High Noon" for the Fed whereby they'll have to decision whether or not to taper. I don't agree with this as I don't think they're going to taper. They know the US economy is fragile and they don't want to do anything that's going to break the back of the economy. I personally don't trade Jobs Friday as the markets have never me shown any sense of normalcy. Just one of my trading rules. I'm more interested in the U6 rate which is the unemployment rate of the long term unemployed. If this report turns out to be very good, the pundits will claim "see, there's no problem with the US economy, the Fed should taper." If it turns out to be lackluster, they'll probably keep their mouths shut but as in all things, time will tell....
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 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 October crude dropped to a low of 107.13 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 $106.59 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.
- Budget Battle - ongoing.
- Debt Ceiling in the September time frame.
- Military Action in Syria - September.
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 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.