Good Morning Traders,
As of this writing 5:10 AM EST, here’s what we see:
US Dollar –Up at 81.280, the US Dollar is up 87 ticks and is trading at 81.280. Energies – March Oil is down at 98.08
Financials – The March 30 year bond is up 10 ticks and trading at 133.19.
Indices – The March S&P 500 emini ES contract is down 32 ticks and trading at 1773.25.
Gold – The February gold contract is trading unchanged at 1242.20 and is down 0 ticks from its close.
Initial Conclusion: This is a nearly correlated market, unfortunately it is correlated to the downside. 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 lower and the US dollar is trading up which is correlated. Gold is trading lower which is 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 lower with the Hang Seng down by triple digits. As of this writing all of Europe is trading lower.
Possible challenges to traders today is the following:
1. Core PCE Price Index m/m is out at 8:30 AM EST. This is major.
2. Employment Cost Index q/q is out at 8:30 EST. This is not major.
3. Personal Spending m/m is out at 8:30 AM EST. This is major.
4. Personal Income m/m is out at 10 AM EST. This is major.
5. Chicago PMI is out at 9:45 AM EST. This is major.
6. Revised UoM Consumer Sentiment is out at 9:55 AM EST. This is not major.
7. Revised UoM Inflation Expectations is out at 9:55 AM EST. This is not major.
8. FOMC Member Fisher Speaks ay 1:15 PM EST. This is major.
Currencies
Yesterday the Swiss Franc made it's move at around 10:20 AM EST after the Pending Home Sales numbers was released. Look at the charts below and you'll see a pattern for both assets. The USD rose at around that time and the Swiss Franc fell. 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. To expand the chart, right click and open in a new window. Kindly view our special video to determine how to capitalize on these trades. http://youtu.be/lOxBMe09X3Q
Charts Courtesy of Trend Following Trades
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| Swiss franc - 03/14 - 1/30/14 |
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| USD - 03/14 - 1/30/14 |
Bias
Yesterday we said our bias was to the downside as the markets weren't correlated and Europe was trading lower across the board. The markets however had other ideas as the Dow gained 110 points and the other indices gained as well. Today the markets are nearly correlated to the downside hence our bias is to the downside Could this change? Of Course. Remember anything can happen in a volatile market.
Yesterday the markets had no reason to gain. Asia traded down, Europe was trading down, the markets weren't correlated and the economic reports weren't too stellar. So what happened? What caused the upswing. In the old days we would call this a deadcat bounce meaning that the markets had fallen so much and so precipitously that short covering alone would cause a reversal. It used to that the adage was "one day up, next day down". That doesn't really work anymore and the problem with these types of moves is that are short-lived and very unexpected. But it is as we say each could this change? Absolutely.....
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:
http://www.futuresmag.com/2013/11/25/correlated-opportunities-in-the-swiss-franc?ref=hpMany 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.
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 March crude dropped to a low of 96.32 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 $97.10 a barrel and resistance at $98.55. 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:
- Debt Ceiling - Well we could say it's official and that a "budget" has been passed by both houses of Congress but Obama still has yet to approve it. If approved this would fund the government until September 30th and remove an uncertainty from the markets. However Obama hasn't approved this yet and current Secretary of the Treasury Jack Lew has already testified before Congress warning that our current debt ceiling will expire on February 7th and that the Treasury could do something to extend until the end of February but won't be able to go much beyond that. Now it may be that Obama is waiting until after he gives his State of the Union address on Tuesday evening before he commits to anything. This is purely subjective on my part but it would make sense. We'll have to monitor and see. As an update to this the President gave his State of the Union address Tuesday night and ironically he does bring forth some very good ideas. I especially liked the MyRa or My IRA. It would strengthen the markets and have more people invested in it. However I'm concerned about his ability to implement it as he has great ideas but not the where with-all to implement. One thing you have to say about this President, he does know how to deliver a speech.
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 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.
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.
