Monday, September 30, 2013

Pre-Market Global Review - 9/30/13 - Government Shutdown - Imminent?

Good Morning Traders,
As of this writing 4:50 AM EST, here’s what we see:
US Dollar –Down at 80.355, the Dec US Dollar is down 22 ticks and is trading at 80.355.             
Energies – November Oil is down at 101.76.       
Financials – The December 30 year bond is up 2 ticks and is trading at 133.16      
Indices – The December S&P 500 emini ES contract is down at 1675.00 and is down 45 ticks.  
Gold – The October gold contract is trading up at 1341.60 and is up 32 ticks from its close.
Initial Conclusion: This is not a correlated market.  The dollar is down- and oil is down-  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 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 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:
Chicago PMI is out at 9:45 AM EST.   This is major.       
Lack of major economic news.                 


On Friday the Swiss Franc made it's move at around 10 AM EST after not too stellar economic news reports.   This was a short opportunity as the USD hit a low at around that time and proceeded to rise,  the Swiss Franc dropped at the around the same time.  The key to capitalizing on these trades is to watch the USD movement.  The USD rising 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? 

Chart Courtesy of Trend Following Trades

USD 9/27/13


On Friday we said our bias was neutral as the markets didn't give us any sense of direction.  However the market was phased by political news on the DC front.  The Dow dropped 70 points and the other indices dropped as well.  Today we are not dealing with a correlated market and our bias is to the downside.  Why?  The possibility of a government shutdown will take front and center today.   Could this change? Of Course.  Remember anything can happen in a volat
ile market.

On Saturday evening the House Republicans voted to delay the implementation of ObamaCare for a year and to opt out of mandatory contraception coverage.  Secretary Lew has told us that the government will shutdown by October 17th unless the debt ceiling is raised.  On Friday Congress increased that until mid November however that is only a band aid and the looming debt ceiling and budget issue remains.  The Senate Democrats have vowed that no language relative to the Affordable Care Act will be acceptable and will vote Monday afternoon to table that discussion for a later date.  All of this means uncertainty and the markets do not like uncertainty.  Yes, it's a bit of an oxymoron as the market is the most uncertain environment on the planet; so they can be uncertain but they don't like any other aspect to lend to uncertainty.  Events are unfolding as I write this but one thing is certain; this will lend to volatility today.  Do I think the government will shutdown?  Well for one thing the government can run until October 17th but the economic reports won't be timely and the Monthly Jobs report may not be issued due to this.  I think they'll take it to the twelve hour and then come up with something.  What that something is is yet to be determined... 

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 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:

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. On Friday November crude dropped to a low of 102.45 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 $100.35 a barrel and resistance at 103.59.  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 - ongoing.      

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  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.