Good Morning Traders,
As of this writing 5:30 AM EST, here’s what we see:
US Dollar – Up at 80.925, the US Dollar is up 119 ticks and is trading at 80.925. Energies – February Oil is up at 93.80.
Financials – The March 30 year bond is down 2 ticks and trading at 128.31.
Indices – The March S&P 500 emini ES contract is up 24 ticks and trading at 1826.75.
Gold – The February gold contract is trading down at 1236.90 and is down 10 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 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.
Asia traded mainly lower, with the exception of the Shanghai and Hang Seng exchanges which closed higher. As of this writing all of Europe is trading higher.
Possible challenges to traders today is the following:
1. Trade Balance is out at 8:30 AM EST. This is major.
2. IBD/TIPP Economic Optimism is out at 10 AM EST. This is not major.
3. Lack of economic news.
Currencies
Yesterday the Swiss Franc made it's move at around 10:30 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 rise only lent confirmation to the move. As a trader you could have netted 20 ticks on this trade. As many of you know this past week was especially challenging for us because there was an issue with Ninja Trader, version 7, release 18. John Karnas, the CEO of Trend Following Traders personally spent hours with me on a Sunday to resolve this issue. I think highly of their charts and would recommend them. If you wish additional details, feel free to contact me. We finally have charts that we can show.
Charts Courtesy of Trend Following Trades
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| Swiss Franc - 3/14 - 1/6/14 |
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| USD - 3/14 - 1/6/14 |
Bias
Yesterday we said our bias was neutral as the market wasn't giving any clear direction. As expected the market fell and the Dow dropped 45 points. The other indices lost ground as well. Today we aren't dealing with a correlated market however our bias is to the upside. Why? Europe is trading higher, the US futures are higher and the Bonds are trading trading lower. Could this change? Of Course. Remember anything can happen in a volatile market.
Yesterday when we first viewed the markets we could sense that something was wrong because although the index futures were pointed up. the Bonds were trading higher and Gold was dropping. Additionally there was no correlation between the USD and Bonds. In an upward market the opposite would be true: Bonds would be lower and Gold higher. This was not the case so we gave a neutral bias which means the markets could go in any direction. In our video, we also emphasized the economic reports and a major one: the ISM Non-Manufacturing PMI did not meet expectation coming in at 53.0 versus 54.6 expected. Any number above 50 represents growth and expansion so whereas the number didn't meet expectation; it doesn't suggest a slowdown. The markets however aren't that forgiving as we're in a new year now and the Santa Claus rally is over. So it would appear as though the markets will be viewing these reports as they should.
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 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 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. Yesterday February crude dropped to a low of 93.20 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 $92.87 a barrel and resistance at $94.96. 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. I was wondering why Obama is reluctant to sign the budget deal until it was revealed that this budget doesn't include any extension of Unemployment Benefits. This surprises me as how could Patty Murray, a Democrat from Washington State allow this? It also tells me that our elected morons don't read the bills that they vote on. Obama seeks to augment this by pushing thru a bill that will extend UI benefits and that bill should be voted on today or tomorrow. As an update to this, the Senate has postponed the vote on this bill until today.
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/2278223/does-this-company-manufacture-junk
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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