Good Morning Traders,
As of this writing 5:25 AM EST, here’s what we see:
US Dollar –Down at 79.670, the Dec US Dollar is down 48 ticks and is trading at 79.670.
Energies – November Oil is down at 100.82.
Financials – The December 30 year bond is up 14 ticks and is trading at 134.18.
Indices – The December S&P 500 emini ES contract is up at 1730.00 and is up 9 ticks.
Gold – The December gold contract is trading down at 1316.20 and is down 70 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 up and the US dollar is trading lower which is correlated. Gold is trading lower which is not 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.
All of Asia closed closed higher with exception of the Nikkei exchange which closed fractionally lower. As of this writing all of Europe is trading higher.
Possible challenges to traders today is the following:
1. FOMC Member Tarullo Speaks at 12:30 PM EST. This is major.
2. FOMC Member Evans Speaks at 2 PM EST. This is major.
3. FOMC Member Dudley Speaks at 3:40 PM EST. This is major.
4. FOMC Member Stein Speaks at 4:30 PM EST. After close of trading.
Currencies
Yesterday the Swiss Franc made it's move at around 8:45 AM EST after the Unemployment Claims numbers were 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 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?
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| Chart Courtesy of Trend Following Trades |
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| USD - 12/13 - 10/17/13 |
Bias
Yesterday we said our bias was to the downside as the markets were mainly correlated as such. The net result being that the Dow lost 2 points but the other indices gained. There's a rumor about that the Fed won't consider tapering in the near term as the debt deal is still a work-in-progress. Today we have 4 Fed members speaking so it'll be interesting to hear what they have to say. Today the markets aren't correlated however our bias is to the upside as the USD is trading lower and the indices are pointing to a positive open. Could this change? Of Course. Remember anything can happen in a volatile market.
Well the Debt Deal is done and everyone can breath a sigh of relief. The question now is what will the Fed do? I heard a rumor spreading around that the Fed won't consider tapering or slowing down QE due to the debt deal and for once it's rumor I can probably believe. My thought is the Fed isn't going to do anything to slow down the economy and tapering can certainly create that prospect. They know that we aren't out of the woods yet when it comes to this issue. Remember the debt deal is nothing more than a reprieve and a temporary stop-gap measure. The real fireworks will start when the committee is formed and they go to bat at one another. This seems to be the new and improved GOP strategy. If you can't get your way hinder, delay, procrastinate. In other words wear down your opponent. I have no doubt that this "committee" won't be able to agree or compromise on anything. To me it is too reminiscent of 2011, but time will tell....
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 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 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. Yesterday November crude dropped to a low of 100.06 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 $99.78 a barrel and resistance at 102.00. 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 - Forthcoming.
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.
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.
