Good Morning Traders,
As of this writing 5:10 AM EST, here’s what we see:
US Dollar –Up at 79.780, the Dec US Dollar is up 53 ticks and is trading at 79.780.
Energies – December Oil is down at 100.42.
Financials – The December 30 year bond is up 1 tick and is trading at 134.04.
Indices – The December S&P 500 emini ES contract is up at 1737.50 and is up 4 ticks.
Gold – The December gold contract is trading up at 1317.10 and is up 25 ticks from its close.
Initial Conclusion: This is not a correlated market. The dollar is up+ and oil is down- which is 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 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.
All of Asia closed closed higher with the exception of the Indian Sensex exchange which is currently trading lower. As of this writing Europe is trading lower with the exception of the London exchange which is trading higher.
Possible challenges to traders today is the following:
1. FOMC Member Evans Speaks at 8 AM EST. This is major.
2. Existing Home Sales are out at 10 AM EST. This is major.
3. Crude Oil Inventories are out at 10:30 AM EST. This can move the crude markets.
Currencies
On Friday the Swiss Franc made it's move at around 9:20 AM EST. 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 - 10/18/13 |
Bias
Friday we said our bias was to the upside as the futures were pointing towards a positive open. The markets didn't disappoint as the Dow closed 28 points higher and the Nasdaq and S&P closed higher. The S&P is now at an all time high. Today we are not dealing with a correlated market. However our bias is to the downside. Could this change? Of Course. Remember anything can happen in a volatile market.
Now that the Debt Deal is done everyone seems to be relaxed and enjoying it. As traders we like to see stability in the markets and should enjoy it for as long as we can. Personally as an intra-day trend trader I like seeing predictable patterns based on Market Correlation and this type of market is good for that. The question is how long will that last? Of course we can't really be sure but the next 6 weeks should be good for trading. The real action should start at the time the bipartisan committee meets and starts shooting at each other (and believe me, they will). Some food for thought going forward is we will start to see economic reports in the days ahead but they will be "dated". As an example the NFP (Non-Farm Payrolls) will be coming out this Tuesday. It will probably not be up to date as the government employees will not have had the time to update them. Case-in-point the NFP coming out on Tuesday was to have been released on Friday, October 4th but due to the shutdown couldn't be. Be mindful of this if trading these reports when released. Best strategy: wait for market reaction after the reports are released and then decide accordingly... For more info on this, go to: http://www.bls.gov/bls/updated_release_schedule.htm
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 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 advancing. 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. On Friday November crude dropped to a low of 100.54 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 $100.03 a barrel and resistance at 101.83. 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 advancing. 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 10:30 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.
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.
