Good Morning Traders,
As of this writing 5:10 AM EST, here’s what we see:
US Dollar –Up at 80.535, the US Dollar is up 72 ticks and is trading at 80.535.
Energies – April Oil is down at 102.16.
Financials – The March 30 year bond is up 14 ticks and trading at 134.17.
Indices – The March S&P 500 emini ES contract is down 22 ticks and trading at 1836.50.
Gold – The April gold contract is trading up at 1330.20 and is up 22 ticks from its close.
Initial Conclusion: This is a nearly 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 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 traded higher with the exception of the Japanese Nikkei which traded down. As of this writing all of Europe is trading lower.
Possible challenges to traders today is the following:
1. Core Durable Goods Orders m/m is out at 8:30 AM EST. This is major.
2. Durable Goods Orders m/m is out at 8:30 AM EST. This is major.
3. Unemployment Claims are out at 8:30 AM EST. This is major.
4. Fed Chair Yellen Testifies at 10 AM EST. This is major.
5. Natural Gas Storage is out at 10:30 AM EST. This could move the Nat Gas market.
Currencies
Yesterday the Swiss Franc made it's move at around 10 AM EST after the New Home Sales numbers came out. 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 15 ticks on this trade, whereas this may not seem like much understand that each tick on the Swiss Franc is worth $12.50. 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 - 2/26/14 |
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| USD - 03/14 - 2/26/14 |
Yesterday we said our bias was to the upside as crude was higher and the Bonds were lower. The net result? The Dow gained 18 points and the other indices gained as well. Today we are dealing with a nearly correlated that is correlated to the downside. If Gold were trading lower I would say it's completely correlated to the downside. Hence our bias is down. Could this change? Of Course. Remember anything can happen in a volatile market.
Yesterday as predicted the markets opened higher, then went lower prior to 10 AM. When the New Home Sales numbers were released the markets took off, went negative at around 2 PM and then went higher after 3 PM but at the end of the day we were in positive territory. One of the benefits of Market Correlation is that it can provide insight as to the trading day ahead. Our goal and objective is to provide you with that insight such that you may have a clue as to what could happen in the trading session for that day. Today we have Janet Yellen testifying before the Senate so it will be interesting to see what she says. If this is anything liken to her last testimony, it may turn out to be a positive day. 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:
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 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 April crude dropped to a low of 102.12 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 $101.77 a barrel and resistance at $102.97. 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. Yesterday crude went up dramatically based on the Wednesday inventory numbers. As such I created a video to show how Market Correlation could be used in tandem with a crude trade. The video can be viewed at: http://youtu.be/9VZRInAPusg
Future Challenges:
- Budget - I've been asking why the Executive Branch of government hasn't endorsed any of the Budgets passed by both the House of Representatives and the Senate. On Friday I think I got my answer as the White House announced that it is proposing their version of a budget. This was supposed to be released on March 4th but in order to garner Congressional support, it was released this past week. This version of a budget will clearly attack high net worth individuals as it will cap the amount of retirement income they can squirrel away but a cap on deductions. It will also attempt to bolster retirement income for the Middle Class. It will not touch Social Security as the notion of "Chained CPI" won't pass muster. Why? The GOP hasn't offered any alternative. In all likelihood this budget has virtually no chance of passing as Congress controls the purse strings and with a GOP controlled House, virtually none of these ideas will pass. From a political perspective it does make sense as the mid-term elections are held this year and I suspect the White House wants to bring these issues to the table sooner as opposed to later. If the American people give the White House a Democratic controlled House of Representatives, then it has a chance to get passage on key bills for passage such as the Myra plan. Time will tell how it all plays out...
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. 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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