Good Morning Traders,
As of this writing 5:15 AM EST, here’s what we see:
US Dollar –Down at 79.235, the Dec US Dollar is down 11 ticks and is trading at 79.235.
Energies – December Oil is up at 97.92.
Financials – The December 30 year bond is down 8 ticks and is trading at 135.03.
Indices – The December S&P 500 emini ES contract is up at 1757.25 and is up 13 ticks.
Gold – The December gold contract is trading down at 1350.10 and is down 24 ticks from its close.
Initial Conclusion: This is a nearly 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 lower 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 traded mainly to the upside with the exception of the Indian Sensex exchange which traded lower. As of this writing Europe is trading mainly higher with the exception of the Paris exchange which is currently trading lower.
Possible challenges to traders today is the following:
1. Capacity Utilization Rate is out at 9:15 AM EST. This is not major
2. Industrial Production Rate is out at 9:15 AM EST. This is not major
3. Pending Home Sales is out at 10 AM EST. This is major.
Currencies
On Friday the Swiss Franc made it's move at around 8:30 AM EST after the Durable Goods numbers were released. 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. Remember that anytime positive news is released, this will cause the USD to fall and the correlated asset to rise. The same principle applies to the markets in general. What happened with the markets on Friday? They rose...
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| Swiss Franc -December, 2013 - 10/25/13 |
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| USD - December, 2013 - 10/25/13 |
Bias
On Friday we said our bias was to the downside as it appeared the markets were correlated in that direction. However each day I say in this newsletter that this could change. Why? The Durable Goods numbers were released pre-market and caused the markets to rise. The Dow rose by 61 points and the other indices gained ground as well. Today we are dealing with a nearly correlated market. If Gold were trading higher I would say it's completely to the upside. Hence our bias is to the upside today. Could this change? Of Course. Remember anything can happen in a volatile market.
On Friday we said our bias was to the downside as the markets were correlated as such. However any subscriber to this newsletter knew that this could change and it did. Each day we produce a Market Bias video that explains this and mentioned in that video on Friday that Durable Goods is a market mover and could change direction. Ironically Core Durable Goods fell. Core Durable Goods includes aircraft, tractors, etc. So what caused Durable Goods to rise? A major component of Durable Goods is Auto Sales. My take is that Auto Sales propelled the Durable Goods numbers. Case-in-point Audi sales in the US are growing on a month-over-month basis. Audi as a luxury brand manufacturer that reported a 10 percent growth in worldwide sales for the month of September and in the United States they saw a 6.2 percent increase. This was their 33rd consecutive month of growth in the US. Locally in my own area Princeton Audi reported a stellar month of growth and record sales. Let's face it Audi isn't cheap or inexpensive. So what caused this to happen? Low interest rates and a slow but steady job growth picture. The US still has much work to do in the job growth arena. At this stage of the recovery the Unemployment rate in the US should be around 5% but currently is 7.2% and that's the official number, in reality it is much higher but it is getting better. This also lends credence to the fact that the Fed isn't in any hurry to raise interest rates or taper anytime soon...
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 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. On Friday December crude dropped to a low of 96.99 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 $97.23 a barrel and resistance at 98.67. 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 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 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.
