As of this writing 5:15 AM EST, here’s what we see:
US Dollar –Up at 80.495, the Dec US Dollar is up 15 ticks and is trading at 80.495.
Energies – November Oil is up at 105.96.
Financials – The December 30 year bond is up 10 ticks and is trading at 131.16
Indices – The December S&P 500 emini ES contract is down at 1716.50 and is down 4 ticks.
Gold – The October gold contract is trading down at 1356.50 and is down 130 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 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 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 some of the exchanges closing lower. As of this writing all of Europe is trading lower.
Possible challenges to traders today is the following:
1. FOMC Member George Speaks at 12:30 PM EST. This is major.
2. FOMC Member Tarullo Speaks at 12:40 PM EST. This is major.
3. FOMC Member Bullard Speaks at 12:55 PM EST. This is major.
Currencies
Yesterday the Swiss Franc made it's move at about 10 AM EST after all the economic data was released. This is one of the aspects that we advocate, to place trades after 10 AM when the markets give a better direction. The USD hit a high at around that time and the Swiss Franc rose. The USD dropping 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.
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| Chart Courtesy of Trend Following Trades |
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| USD 9/19/13 |
Bias
Yesterday we said our bias was to the upside as the markets were correlated as such. However the Smart Money thought otherwise and decided to take money off the table after the FOMC run up. As such the Dow dropped 40 points, the S&P dropped 4 but the Nasdaq gained 5. Today we are not dealing with a correlated market and our bias is neutral which means the markets could go in any direction. Why? There are no major economic reports to drive the markets in any direction today. Everything will hinge on what the FOMC members will say and we won't know that until mid-day after which the markets could be driven in any direction based upon what's said. Could this change? Of Course. Remember anything can happen in a volatile market.
Well it looks as though the Smart Money decided to take capital off the table after the FOMC run up. I think if we didn't have any economic news yesterday the results might have been better but after a run up like that, it's only usual and customary to drop a bit. The question is what will it do today? Well we don't have economic news and that's positive but we do have a trio of FOMC members speaking today. Perhaps this should be known as "why I chose NOT to taper" as no doubt these members will pander to the press on why they made the decisions they made. I just wish they would speak plainly but they'll come up with some exotic reason as to why they made the decision they made. As of late and prior to Wednesday's meeting these guys have been treated like rock stars with the press and media pandering to every word they said to see if there was some clue or hidden meaning in their verbiage. It will be interesting to see 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:
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
http://www.traderplanet.com/commentaries/view/164874-trader-tips-the-case-for-fundamental-analysis/
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 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 higher and the US Dollar is advancing. 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 November crude dropped to a low of 105.57 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 $104.03 a barrel and resistance at 106.56. 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 higher and the US Dollar is advancing. 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.
Recently Published Articles:
http://www.barchart.com/headlines/story/12650453/are-the-markets-rewarding-poor-performance
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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