Good Morning Traders,
As of this writing 4:40 AM EST, here’s what we see:
US Dollar –Down at 80.180, the Dec US Dollar is down 70 ticks and is trading at 80.180.
Energies – November Oil is down at 101.53.
Financials – The December 30 year bond is up 16 ticks and is trading at 133.16.
Indices – The December S&P 500 emini ES contract is down at 1676.25 and is down 54 ticks.
Gold – The October gold contract is trading up at 1293.90 and is up 79 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 mixed with half the exchanges trading higher and the other half lower. As of this writing all of Europe is trading mainly lower.
Possible challenges to traders today is the following:
1. ADP Non-Farm Employment Change is out at 8:15 AM EST. This is major.
2. Crude Oil Inventories are out at 10:30 AM EST. This will move the crude markets.
3. FOMC Member Rosengren speaks at 12 PM EST. This is major.
4. Chairman Bernanke speaks at 3:30 PM EST. This is major.
Yesterday the Swiss Franc made it's move at around 10 AM EST after the economic news was released. This was a long opportunity as the USD hit a high at around that time and proceeded to drop, 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 falling 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|
Yesterday we said our bias was to the upside as the markets were correlated as such. The Dow gained 62 points and the other indices rose as well. Today we are not dealing with a correlated market and therefore our bias is to the downside. Why? The Bonds are trading higher, crude is trading lower and there is no correlation between the USD and Bonds. Could this change? Of Course. Remember anything can happen in a volatile market.
Well right on cue, the government shutdown at midnight on Tuesday and whereas Asia and Europe pretty much shook off any negative impact that this might have on their markets; the US markets followed suit and chose to ignore it as well. Everyone seems to believe that this will be a short lived shutdown liked to 1996 which was the last time this officially happened. There are a few key differences this time around. The GOP was a bit more saner in 1996 and could come to a compromise with Bill Clinton. The GOP today with the advent of the Tea Party is not so willing to do so and let's face it; they don't like this President. There was no ObamaCare in 1996 and today even though the exchanges are open for business, the GOP is still attempting to de-fund it. I find it interesting that a segment of government who professes to love country has no problem seeing up to 800,000 of their fellow citizens furloughed because they shutdown the government. I also find it interesting that these same "loyal" Americans won't give up their paychecks for principle either. Nothing quite like leadership is there? These folks in DC can't come to a compromise because what they want is a repeal of ObamaCare and that is not going to happen. They may call it what they will but the term extortion and blackmail comes to mind. I don't particularly like the law either but when it was approved by Congress (in 2010) and upheld by the Supreme Court in 2011, I have no choice but to say "it's the law" and let's move on. What do I think will happen? I think Congress will muddle thru (as they often do) and then do something by either October 17th when the government actually runs out of money or November if the extension the Senate submitted is approved. I'm fairly certain it will be approved because if not, the same "loyal" Americans won't get a paycheck. The real test is going to come when the debt ceiling is hit and then it's do or die time....
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: http://www.traderslog.com/john-karnas/
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 101.08 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 $100.58 a barrel and resistance at 102.78. 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 - 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 10:30 AM when the inventory numbers are released and 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.