Good Morning Traders,
As of this writing 5:40 AM EST, here’s what we see:
US Dollar –Up at 80.350, the US Dollar is up 164 ticks and is trading at 80.350.
Energies – April Oil is down at 102.68.
Financials – The March 30 year bond is up 3 ticks and trading at 133.02.
Indices – The March S&P 500 emini ES contract is down 8 ticks and trading at 1823.50.
Gold – The April gold contract is trading down at 1314.00 and is down 64 ticks from its close.
Initial Conclusion: This is a correlated market, unfortunately it's 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. As of this writing all of Europe is trading lower.
Possible challenges to traders today is the following:
1. Core CPI m/m is out at 8:30 AM EST. This is major.
2. CPI m/m is out at 8:30 AM EST. This is major.
3. Unemployment Claims is out at 8:30 AM EST. This is major.
4. Flash Manufacturing PMI is out at 9 AM EST. This is not major.
5. Philly Fed Manufacturing Index is out at 10 AM EST. This is major.
6. Mortgage Delinquencies is out at 10 AM EST. This is not major.
7. CB Leading Index m/m is out at 10 AM EST. This is major.
8. Natural Gas Storage is out at 10:30 AM EST. This could move the Nat Gas market.
9. Crude Oil Inventories is out at 11 AM EST. This could move the crude market.
Currencies
Yesterday the Swiss Franc made it's move at around 8:30 AM EST immediately after the economic news 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 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 - 2/19/14 |
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| USD - 03/14 - 2/19/14 |
Bias
Yesterday we said our bias was to the downside as the markets weren't correlated. The Dow dropped by 89 points and the other indices lost ground as well. Today we are dealing with a correlated market, unfortunately it is 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 we said our bias was to the downside as the markets weren't correlated. None of the economic reports met expectation but nonetheless the markets did begin to rise. Then the FOMC Meeting Minutes were released and the markets dropped and stayed lower for the remainder of the session. It turns out that some members of the FOMC have stated that they think interest rates should rise but with Janet Yellen at the helm that will be a hard sell. The majority however wish to keep interest rates low as they do not feel the economy is strong enough yet. The key to this strategy is if inflation remains low. If inflation remains low we'll continue to see low rates. This not withstanding the Fed will continue to taper quantitative easing at the rate of 10 billion a month. Does anyone think that this is wise as we've already seen housing numbers that are not that stellar. I suppose time will tell if this is the correct course of action....
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 102.40 a barrel but maintained the $100 a barrel mark. 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 $101.76 a barrel and resistance at $103.64. 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 - We keep hearing that a budget has been passed and that the House and Senate have approved an extension of the Debt Ceiling until March, 2015, yet we haven't heard that Obama has approved any of these measures. So I have to wonder what is he waiting for? He's finally caught on to the idea that he can issue an Executive Order as he signed one last week increasing the minimum wage for Federal workers. Too bad he didn't anything for the rest of us. Now issuing an Executive Order may lead to absolutely nothing as Congress approves expenditures, not the Executive Branch but at the very least the American people will know where he stands. He could have done the same thing for extending Unemployment Insurance for those who sorely need it or Gun Control if he felt that strongly about it. For a President who's in last term in office and claims that he going to use the power of the pen; he certainly seems to be getting writer's cramp these days...
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 11 AM when the inventory numbers are released and 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.
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