Good Morning Traders,
As of this writing 5:05 AM EST, here’s what we see:
US Dollar –Up at 80.890, the US Dollar is up 102 ticks and is trading at 80.890.
Energies – February Oil is down at 98.75.
Financials – The March 30 year bond is up 6 ticks and trading at 129.12.
Indices – The March S&P 500 emini ES contract is up 16 ticks and trading at 1806.00.
Gold – The February gold contract is trading up at 1196.60 and is up 30 ticks from its close. Note: The front month for crude is now February "14.
The front month for Gold is February'14.
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 higher 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.
Asia traded mainly higher with the exception of the Hang Seng and Shanghai exchanges which traded lower. As of this writing Europe is trading higher.
Possible challenges to traders today is the following:
1. Final GDP q/q is out at 8:30 AM EST. This is major.
2. Final GDP Price Index q/q is are out at 8:30 AM EST. This is major.
3. Fed Chairman Nomination Vote - vote postponed until January 6th.
Yesterday the Swiss Franc made it's move at around 8:30 AM EST after the economic news was released. Look at the charts below and you'll see a pattern for both assets. The USD fell at around that time and the Swiss Franc rose. This was a long opportunity on the Swiss Franc. The key to capitalizing on these trades is to watch the USD movement. The USD fall only lent confirmation to the move. As a trader you could have netted about 20 ticks on this trade. Please note that the front month for both contracts is March, 2014.
Charts Courtesy of Trend Following Trades
|Swiss Franc - 3/14 - 12/19/13|
|USD - 3/14 - 12/19/13|
Yesterday we said our bias was to the downside as the markets were nearly correlated as such. As expected the markets did open to the downside and spent most of the day in negative territory. However the markets did rebound slightly and the Dow ended 11 points higher. The other indices finished in negative territory. Today we are not dealing with a correlated market, however our bias is to the upside. Why? Yesterday Gold dropped below the 1200 mark (which we haven't seen in quite some time) but as of this writing, it is rebounding. Europe is all trading to the upside and the futures are pointing to the upside. Could this change? Of Course. Remember anything can happen in a volatile market.
It would appear as though the taperfest rally that began on Wednesday after the FOMC meeting is a bit short lived as the markets opened lower yesterday and stayed in negative territory most of the day. The economic news didn't help matters either as Unemployment Claims came in at the highest level since March and Existing Home Sales came in at the lowest level in a year. The Senate did pass the budget deal conceived by GOP member Paul Ryan and Democrat Patty Murray. Now it's up to President Obama to sign and I think he'll do so as no one wants a reprise of this past October. Last week when I first spoke about this issue I was amazed at how fast this deal was made and went thru both houses of Congress. Now we're hearing that the debt ceiling needs to be increased by February 7th (as per Secretary Lew) and certain members of Congress are already licking their lips thinking about what they'll get out of this deal. This may very well become a future challenge for us, but as always time will tell.....
Each day in this newsletter we provide viewers a snapshot of the Swiss Franc versus the US dollar as a way and means of capitalizing on the inverse relationship between these two assets. Futures Magazine recognized this correlation as well. So much so that they printed a story on it in their December issue. That story can be viewed at:
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.
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. Yesterday January crude dropped to a low of 97.85 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 $97.95 a barrel and resistance at 99.63. 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 - Senate passes budget deal, now it's up to Obama to sign.
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 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 economic reports 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.
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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.