As of this writing 5:00 AM EST, here’s what we see:
US Dollar –Up at 80.189, the US Dollar is up 67 ticks and is trading at 80.189.
Energies – February Oil is up at 98.73.
Financials – The March 30 year bond is down 15 ticks and trading at 128.10.
Indices – The March S&P 500 emini ES contract is up 25 ticks and trading at 1841.00.
Gold – The February gold contract is trading up at 1219.80 and is up 175 ticks from its close.
Initial Conclusion: This is not a correlated market. The dollar is up+ and oil is up+ 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 higher and the US dollar is trading up 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 mixed with half the exchanges trading higher and the other half lower. As of this writing Europe is trading lower.
Possible challenges to traders today is the following:
1. Unemployment Claims are out at 8:30 AM EST. This is major.
2. Final Manufacturing PMI is out at 9 AM EST. This is major.
3. ISM Manufacturing PMI is out at 10 AM EST. This is major.
4. Construction Spending m/m is out at 10 AM EST. This is major.
5. ISM Manufacturing Prices is out at 10 AM EST. This is not major.
Currencies
On Tuesday the Swiss Franc made it's move at around 10:20 AM EST after the Conference Board Consumer Confidence numbers were 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 rise only lent confirmation to the move. As a trader you could have netted 20-30 ticks on this trade.
Please note: the charts below are from Monday, 12/30/13. Unfortunately we are experiencing technical difficulties with Ninja Trader, version 7, Release 18. When this issue is resolved we will provide charts as usual.
Charts Courtesy of Trend Following Trades
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| Swiss Franc - 3/14 - 12/30/13 |
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| USD - 3/14 - 12/30/14 |
Bias
On Tuesday we said our bias was neutral as the futures didn't give any sign as to direction. A neutral bias means the markets could go in any direction. The Dow closed 73 points higher and the other indices gained ground as well. Today we aren't dealing with a correlated market however our bias is to the upside. Why? The Bonds are trading lower, Gold is trading higher and the index futures are pointing up. Could this change? Of Course. Remember anything can happen in a volatile market.
The Holiday Season is winding down to a close, so now the big question is what kind of year will 2014 be? Some analysts are predicting a stellar 2014 while others are waiting for a market drop. My take is we'll wait for the markets to show us its hand before making any rash decisions. The thing about day trading is that each day has the potential to be different from the day before. Will there be a January Effect? Will we see a sell-off as some pundits are predicting? Only time will tell but as we said on Tuesday my take is Earnings Season will light the way. Earnings Season traditionally begins with Alcoa reporting earnings and recently their stock has hit a 52 week high so currently it shows a bullish stance. Will this continue? Only 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:
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 neutral. 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 higher and the US Dollar is higher. 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. On Tuesday January crude dropped to a low of 98.15 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 $97.40 a barrel and resistance at $99.90 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 - Senate passes budget deal, now it's up to Obama to sign.
Crude oil is trading higher and the US Dollar is advancing. 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.
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.
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