As of this writing 5:10 AM EST, here’s what we see:
US Dollar –Down at 81.315, the Dec US Dollar is down 133 ticks and is trading at 81.315.
Energies – November Oil is down at 105.70.
Financials – The December 30 year bond is up 14 ticks and is trading at 130.08
Indices – The December S&P 500 emini ES contract is down at 1689.75 and is down 6 ticks.
Gold – The October gold contract is trading up at 1318.50 and is up 7 ticks from its close.
Initial Conclusion: This is not a correlated market. The dollar is down- and oil is down- which is not 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 lower which is not correlated. Gold is trading higher which is 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 lower with exception of Singapore which closed fractionally higher. As of this writing all of Europe is trading lower.
Possible challenges to traders today is the following:
1. Treasury Secretary Lew speaks at 8:15 AM EST. This is major.
2. Core CPI is out at 8:30 AM EST. This is major.
3. CPI is out at 8:30 AM EST. This is major.
4. TIC Long Term Purchases are out at 9 AM EST. This is not major.
5. NAHB Housing Market Index is out at 10 AM EST. This is major.
Yesterday the Swiss Franc made it's move at about 9 AM EST after the Empire State Manufacturing Index number was released. The USD hit a low at around that time and the Swiss Franc dropped. The USD rising 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? Please note that these charts are December 2013 due to contract rollover.
|Chart Courtesy of Trend Following Trades|
|USD December' 13 9/16/13|
Yesterday we said our bias was to the upside as the dollar was trading lower and Gold (at that point) was trading higher. Both of which are bullish for the markets and indices. As such the Dow gained 119 points and the S&P breached the 1700 level. Today we aren't dealing with a correlated market however our bias is to the downside. Why? The Bonds are higher, Asia closed lower and Europe is currently trading lower. Additionally we feel that after two days of advances the Smart Money may want to take some capital off the table. Could this change? Of Course. Remember anything can happen in a volatile market.
On Sunday before the Asian markets opened it was announced that Larry Summers had bowed out of contention for the Fed chief position. I was curious to see how the markets would react to this news but Monday morning I was pleasantly surprised to see that the global markets had taken this news as positive. I've said for awhile that I didn't believe Larry Summers was a good choice for the top spot at the Federal Reserve. This is the man that destroyed Glass-Steagall in the 1990's which ultimately led to Financial meltdown of 2008. In any case the markets reacted positively to this news so much so that when the Empire State Manufacturing Index came in below expectation it didn't faze the markets at all. Neither did the news that gunman at the Washington Navy Yard killed 13 people. Now we don't mean to light of this; our thoughts and prayers go out to the victim's families but unfortunately these events occur when we don't have true economic prosperity. This entire summer we've been bombarded with the question "will the Fed taper, if so when?" We've even coined a name for it: Sept taper. I know many people who swear the Fed will taper at this upcoming FOMC meeting and my question is "what if the Fed doesn't"? Their reaction is " "well the dollar will free fall", and if the dollar free falls what will happen to the markets? If you've been following Market Correlation for any length of time, you already know the answer. The markets will climb...
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 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 106.03 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 $105.40 a barrel and resistance at 107.27. 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. Please bear in mind that the front month for crude is now November and that because of Syria talks crude is degradating in value.
- 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 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.