Good Morning Traders,
As of this writing 5:35 AM EST, here’s what we see:
US Dollar –Down at 80.515, the Dec US Dollar is down 46 ticks and is trading at 80.515.
Energies – November Oil is up at 101.41.
Financials – The December 30 year bond is down 5 ticks and is trading at 132.00.
Indices – The December S&P 500 emini ES contract is up at 1699.50 and is up 30 ticks.
Gold – The December gold contract is trading up at 1278.10 and is up 49 ticks from its close.
Initial Conclusion: This is a correlated market. The dollar is down- and oil is up+ which is normal and 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 lower which is 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 the exception of the Singapore and Nikkei exchanges which closer higher. As of this writing all of Europe is trading lower.
Possible challenges to traders today is the following:
1. NAHB Housing Market Index is out at 10 AM EST. This is major.
2. Beige Book is out at 2 PM EST. This is major.
3. Lack of economic news.
Currencies
On Friday the Swiss Franc made it's move at around 9:45 AM EST This was a shorting 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 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? And this is with a government shutdown which means these rules will work regardless of what else is going on....
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| Chart Courtesy of Trend Following Trades |
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| USD - 12/13 - 10-16-13 |
Bias
Yesterday we said our bias was neutral as the markets weren't giving any sense of direction. A neutral bias means the markets could go in any direction. Empire State manufacturing Index gave the lowest reading in months and the Dow dropped by 133 points. The other indices lost ground as well. Today ironically we are dealing a correlated market, hence our bias is to the upside. Could this change? Of Course. Remember anything can happen in a volatile market.
Yesterday we mentioned that Harry Reid and Mitch McConnell had a "good meeting" and it seemed as though a compromise would be reached. Today we learned that the GOP dominated House of Representatives is jumping into the act and is now devising their own plan. The question is if whether or not the plan the House comes up will be acceptable to the Senate and President Obama. My take is no it won't and I hope I'm wrong. The GOP will probably extend the debt ceiling to December 15th (just in time for Christmas) and this won't be acceptable to the Democrats. I'm a bit amazed at the Dems though. Haven't we been here once before? Didn't we already see this movie? The GOP is attempting to buy time so they can make it appear as though the Democrats are the obstructionists. The GOP also wants to get as close to February as possible because they know the next round of sequester cuts will become effective and they want that. It seems that this will continue until November, 2014 as that is the only time that the radical right wing can be voted out of office. But assumes that the American people are wise enough to know and remember this drama. In the meantime we only have one day left....
As an update to this, the House scrapped a vote last night which is political talk for Speaker Boehner to say "we don't have enough votes to get something passed". Of course, he didn't say this publicly, but that's what happened. The Senate will now take center stage in terms of getting something passed but they won't reconvene till 12 noon today. Talk about last minute...
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 to the upside. 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 higher and the US Dollar is declining. This is 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 100.88 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 $100.46 a barrel and resistance at 102.02. 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 higher and the US Dollar is declining. This is 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.traderplanet.com/commentaries/view/164874-trader-tips-the-case-for-fundamental-analysis/
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.
