As of this writing 5:25 AM EST, here’s what we see:
US Dollar –Up at 81.780, the Dec US Dollar is up 106 ticks and is trading at 81.780.
Energies – October Oil is down at 107.43.
Financials – The December 30 year bond is down 5 ticks and is trading at 129.15
Indices – The September S&P 500 emini ES contract is down at 1682.50 and is down 10 ticks.
Gold – The October gold contract is trading down at 1305.50 and is down 248 ticks from its close.
Initial Conclusion: This is not a correlated market. The dollar is up+ and oil is down- which is normal but 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 lower which is 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 lower with exception of the Nikkei exchange which closed 18 points higher. Please note a story came out from the Nikkei that exclaimed President Obama will announce Larry Summers as the next Fed Chief after next week's FOMC meeting. I guess the Japanese know something we don't. In my mind this is pure speculation but unfortunately it will probably be taken as fact. For me, when it happens, it happens. As of this writing all of Europe is trading lower.
Possible challenges to traders today is the following:
1. Core Retails Sales are out at 8:30 AM EST. This is major.
2. PPI is out at 8:30 AM EST. This is major.
3. Retail Sales are out at 8:30 AM EST. This is major.
4. Core PPI is out at 8:30 AM EST. This is major.
5. Preliminary UOM Consumer Sentiment is out at 9:55 AM EST. This is major.
6. Preliminary UOM Inflation Expectations are out at 9:55 AM EST. This is major
7. Business Inventories are out at 10 AM EST. This is not major.
Yesterday the Swiss Franc made it's move at around 8:30 AM EST immediately after the Unemployment Claims numbers were released. The USD hit a high at around 8:30 AM EST and the Swiss Franc took off at around the same time. The USD falling only lent confirmation to the move. As a trader you could have netted 20-30 ticks on this trade. And you thought markets weren't correlated? Take a look at the USD chart and watch the spike that occurred at 8:30, see how high that was. This is what Tradeguider CEO Gavin Holmes calls a "Yao Ming" because it's so tall. One thing you'll always notice is that when you have a spike that tall, it will reverse...
|Chart Courtesy of Trend Following Trades|
Yesterday we said our bias was to the downside as the markets were nearly correlated as such. The only missing ingredient was crude trading higher. Other than that the markets were correlated to the downside. As such the Dow closed down 26 points and the other indices closed lower as well. Today we are not dealing with a correlated market and as such our bias is to the downside. Why? The USD is higher, Gold is lower. In fact liken to yesterday this is a nearly correlated market to the downside. The missing ingredient are the Bonds. If the Bonds were trading higher it would completely correlated to the downside. Could this change? Of Course. Remember anything can happen in a volatile market.
Yesterday I was listening to Bloomberg Radio as the Unemployment Claims were announced and was surprised to see a drop of such magnitude. What no one gathered from the report was that the Department of Labor also mentioned that there was a computer error that caused two states to miss the cutoff for reporting. Call me skeptical but I just don't buy this report. What this report does tell me (if true) is that alot of people exhausted their unemployment benefits and there is no chance for an extension at this time. Congress will never approve it and this President doesn't have the stomach for it. He can't even order an airstrike on Syria without someone giving him approval. What will he do when the budget battle becomes front and center? What will he do when the US has another "fiscal cliff" on it's hands? Only time will tell what happens next...
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:
TraderPlanet published an article I produced called The Case for Fundamental Analysis. Feel free to visit and provide any comments you may have. In case you weren't aware Market Correlation is mainly fundamental analysis specific to Futures and the Futures markets.
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 advancing. 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 107.30 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 $107.58 a barrel and resistance at 109.86. 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 lower and the US Dollar is advancing. 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.