As of this writing 4:40 AM EST, here’s what we see:
US Dollar –Up at 80.560, the Dec US Dollar is up 117 ticks and is trading at 80.560.
Energies – November Oil is up at 102.80.
Financials – The December 30 year bond is down 13 ticks and is trading at 133.06
Indices – The December S&P 500 emini ES contract is up at 1689.25 and is up 13 ticks.
Gold – The October gold contract is trading up at 1337.50 and is up 16 ticks from its close.
Initial Conclusion: This is not a correlated market. The dollar is up+ and oil is up+ which is not 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 up and the US dollar is trading higher which is not 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 mixed with half the exchanges trading higher and the other half trading lower. As of this writing all of Europe is trading mainly lower.
Possible challenges to traders today is the following:
1. Unemployment Claims are out at 8:30 AM EST. This is major.
2. Final GDP q/q is out at 8:30 AM EST. This is major.
3. Final GDP Price Index q/q is out at 8:30 AM EST. This is major.
4. Pending Home Sales m/m is out at 10 AM EST. This is major
5. FOMC Member Stern Speaks at 10:10 AM EST. This is major
6. Natural Gas Storage is out at 10:30 AM EST. This can move the Nat Gas market.
Currencies
Yesterday the Swiss Franc made it's move at about 8:45 AM EST after deplorable economic news reports. This was a long opportunity as the USD hit a high at around that time and proceeded to fall, the Swiss Franc rose at the around the same time. The key to capitalizing on these trades is to watch the USD movement. The USD dropping only lent confirmation to the move. As a trader you could have netted 20 ticks on this trade. And you thought markets weren't correlated?
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| Chart Courtesy of Trend Following Trades |
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| USD 9/25/13 |
Bias
Yesterday we said our bias was to the upside as the markets were nearly correlated as such. However between the deplorable economic news and Ted Cruz' talkathon this only added fear into an already volatile market. The Dow dropped 62 points and the other indices lost ground as well. Today we are not dealing a correlated market and our bias in neutral meaning the markets could go in any direction today. Could this change? Of Course. Remember anything can happen in a volatile market.
Yesterday the markets were nearly correlated and the only missing ingredient was the Bonds trading higher. Yet we had not too stellar economic reports as Core Durable Goods fell by one tenth of 1 percent and did not meet expectation. Durable Goods didn't do too well and New Home Sales did not meet expectation. Yet the markets overcame this and up to 11:30 AM EST, the markets actually gained ground. Then we discovered that Texas Senator Ted Cruz talked for 20 hours demanding the repeal of ObamaCare, at this date! Evidently the fear of a government shutdown took hold and reversed any gains the market had. Then it was revealed that some Democrats actually want a government shutdown so as to blame the Republicans. What these people in DC don't understand is that when they play these political they've playing with our money as they don't necessarily have any skin in this game but as traders, we do. I suspect that if we didn't have this political intrigue today, the markets would have went higher...
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 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 102.20 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 $101.95 a barrel and resistance at 103.79. 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.
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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