Good Morning Traders,
As of this writing 5:05 AM EST, here’s what we see:
US Dollar –Down at 80.740, the Dec US Dollar is down 86 ticks and is trading at 80.740.
Energies – January Oil is down at 93.56.
Financials – The December 30 year bond is down 1 tick and trading at 132.31.
Indices – The December S&P 500 emini ES contract is down 8 ticks and trading at 1786.75.
Gold – The December gold contract is trading up at 1274.30 and is up 21 ticks from its close.
Note: The front month for crude is now January "14.
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 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 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 traded mainly lower with the exception of the Aussie and Indian Sensex exchanges which closed higher. As of this writing all of Europe is trading lower.
Possible challenges to traders today is the following:
1. Employment Cost Index q/q is out at 8:30 AM EST. This is not major
2. Treasury Sec Lew Speaks at 8:45 AM EST. This is major.
3. FOMC Member Dudley Speaks at 10 AM EST. This is major.
4. FOMC Member Evans Speaks at 2:15 PM EST. This is major.
5. President Obama Speaks at 3 PM EST. This is major.
Yesterday the Swiss Franc made it's move at around 10:15 AM EST. This was after the NAHB Housing numbers came out. The USD hit a low at around that time and proceeded to rise, the Swiss Franc dropped at the around the same time. This was a shorting opportunity on the Swiss Franc. The key to capitalizing on these trades is to watch the USD movement. The USD rise only lent confirmation to the move. As a trader you could have netted 20-30 ticks on this trade.
Charts Courtesy of Trend Following Trades
|Swiss Franc - 12/13 - 11/18/13|
|USD - 12/13 - 11/18/13|
Yesterday we said our bias was neutral as all the instruments we track weren't showing their hand in terms of direction. A neutral bias means the markets could go in any direction. The Dow gained 14 points but the other indices lost ground. Today we aren't dealing with a correlated market however our bias is to the upside. Why? The USD and Bonds are both currently trading lower and Gold is trading higher. However as of this writing the indices are not showing follow-thru, be mindful of this if trading today. Could this change? Of Course. Remember anything can happen in a volatile market.
Yesterday the NAHB Housing numbers came in less than expected but as we said in our Market Bias video if the economic reports come in less than expected the markets will reward this and apparently they did as the Dow reported a gain even though the Nasdaq and S&P lost ground. It appears that this is the trend for the foreseeable future as the Smart Money will continue to reward not too stellar economic reports with gains as the mindset is clearly set on the notion that the Fed won't taper as long as the news is bad. This entire rally is built around that notion, not on the notion that the economy is doing better (which it isn't). Now we have a proverbial cast of thousands speaking today starting with Secretary Lew and ending with President Obama. Of course we have no idea what they'll say but clearly one or more of them will have an impact on the markets and trading today. Kinda of reminds of the song by Neon Trees "Everybody Talks"; unfortunately no one's listening....
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 upside. Could this change? Of course. In a volatile market anything can happen. We'll have to monitor and see.
Recently I had the opportunity to interview Mr. Michel Julien of Trader Crude Oil. Michel has a very interesting proposition. Michel is involved in crude oil trading and has been so for a number of years. His philosophy is to master one commodity and to become an expert at it. He is opening his trading room on November 4th and those that signup for it will have the chance to shadow his trades. The best news of all? His trading room is offered on a contributory basis, in other words you decide to pay what you think it's worth on a contributory basis. No spending hundreds of dollars a month only to find that it wasn't worth what you thought. This is an extremely unique value proposition and could potentially be a game-changer in the field of online subscription services. To view the article I've written on Michel, go to:
To watch the video interview I did with Michel:
As an update on this, one of the things that Michel also does is to report his wins and losses. This is significant because it shows that above all, he's a trader and has the same concerns all traders have.
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 January crude dropped to a low of 93.38 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 $92.65 a barrel and resistance at 94.59. 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 - 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 9 AM EST, 11 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.
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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.