Good Morning Traders,
As of this writing 5:25 AM EST, here’s what we see:
US Dollar –Down at 79.875, the US Dollar is down 431 ticks and is trading at 79.875.
Energies – April Oil is down at 102.03.
Financials – The March 30 year bond is down 11 ticks and trading at 134.10.
Indices – The March S&P 500 emini ES contract is down 10 ticks and trading at 1851.25.
Gold – The April gold contract is trading down at 1328.40 and is down 34 ticks from its close.
Initial Conclusion: This is not a correlated market. The dollar is down- and oil is down- which is not normal and 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 lower and the US dollar is trading down which is not correlated. Gold is trading lower which is not correlated with the US dollar trading down. 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 traded higher with the exception of the Japanese Nikkei which traded down. As of this writing all of Europe is trading lower with the exception of the German DAX which is trading fractionally higher.
Possible challenges to traders today is the following:
1. FOMC Member Fisher Speaks 5 AM EST. This is major.
2. Prelim GDP q/q is out at 8:30 AM EST. This is major.
3. Prelim GDP Price Index q/q is out at 8:30 AM EST. This is major.
4. Chicago PMI is out at 10 AM EST. This is major.
5. Revised UoM Consumer Sentiment is out at 9:55 AM EST. This is not major.
6. Revised UoM Inflation Expectations is out at 9:55 AM EST. This is not major.
7. Pending Home Sales m/m is out at 10 AM EST. This is major.
8. FOMC Member Kocherlakota Speaks at 10:15 AM EST. This is major.
9. FOMC Member Stein Speaks at 10:15 AM EST. This is major.
Currencies
Yesterday the Swiss Franc made it's move at around 10:50 AM EST after Jane Yellen started her testimony to Congress. 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 20-30 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 - 2/27/14 |
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| USD - 03/14 - 2/27/14 |
Bias
Yesterday we said our bias was to the downside as the futures were correlated as such with the exception of Gold. Then Janet Yellen started to speak before Congressional leaders and just as we witnessed on February 11th, the market reacted favorably to her comments. As such the Dow gained 75 points and the other indices gained as well. Today we are not dealing with a correlated market and our bias is neutral. Could this change? Of Course. Remember anything can happen in a volatile market.
Yesterday we said in our commentary that if Janet Yellen's testimony before Congress was anything liken to her last; the markets would react favorably. In fact she did and the markets did. It is very clear that the Fed is in no rush to raise interest rates anytime soon. Yellen is wise enough to realize that the economy is still fragile and raising interest rates will have a negative impact on the economy as business activity will slow. The bigger story is her impact on the markets. This is the 2nd time in less than a month that she's spoken and thus far each time has been positive for the markets. The markets opened lower as we suggested it would, but look what happened after 10 AM EST when Yellen started to speak. The 1st dot on the chart below represents 10 AM. The DJIA took off and didn't look back.
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| DJIA - 2/27/14 |
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 lower and the US Dollar is declining. 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 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.
On Wednesday crude oil inventory numbers was released and crude jumped dramatically. 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 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. 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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