As of this writing 5:25 AM EST, here’s what we see:
US Dollar –Up at 79.855, the US Dollar is up 135 ticks and is trading at 79.855.
Energies – April Oil is down at 103.99.
Financials – The March 30 year bond is up 24 ticks and trading at 135.11.
Indices – The March S&P 500 emini ES contract is down 62 ticks and trading at 1842.00.
Gold – The April gold contract is trading up at 1343.10 and is up 215 ticks from its close.
Initial Conclusion: This is a nearly correlated market, unfortunately it is correlated to the downside. The dollar is up+ and oil is up+ which is not 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.
All of Asia traded traded lower with the exception of the Shanghai exchange which traded higher. As of this writing all of Europe is trading lower.
Possible challenges to traders today is the following:
1. Core PCE Price Index m/m is out at 8:30 AM EST. This is major.
2. Personal Spending m/m is out at 8:30 AM EST. This is major.
3. Personal Income m/m is out at 8:30 AM EST. This is major.
4. Final Manufacturing PMI is out at 9 AM EST. This is major.
5. ISM Manufacturing PMI is out at 10 AM EST. This is major.
6. Construction Spending m/m is out at 10 AM EST. This is major.
7. ISM Manufacturing Prices is out at 10 AM EST. This is major.
8. Total Vehicle Sales - All Day. This is major.
Currencies
On Friday the Swiss Franc made it's move at around 10:15 AM EST after the economic news was released and the FOMC members started to speak. 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 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 - 2/28/14 |
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| USD - 03/14 - 2/28/14 |
Bias
On Friday we said our bias was neutral as all the futures instruments were pointed down with no correlation at all. Then Chicago PMI came out and the markets didn't look back. As such, the Dow gained 49 points but the Nasdaq dropped by 11. Today we are dealing with a nearly correlated market however it is correlated to the downside. Could this change? Of Course. Remember anything can happen in a volatile market.
Friday was a volatile day in that at 5 AM we had an FOMC Member speaking in Switzerland to the Swiss National Bank and for whatever reason the USD dropped like a rock and the Swiss Franc went thru the roof. Then we saw each and every futures instrument trading lower with no correlation at all. As such our bias was neutral which means it could go in any direction. On top of all this we had 9 economic reports. At 9:45 AM EST Chicago PMI was released and exceeded expectation. It came in at 59.8 versus 57.9 expected. As soon as that occurred the Dow Jones Industrial Average took off and remained in positive territory most of the trading session but dropped in the afternoon, only to regain ground and close 49 points higher. All in all a very volatile day.
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| DJIA - 2/28/14 |
As of this writing markets worldwide are being effected by by the Russian military moves with the Ukrainian peninsula of Crimea. This is Ukrainian territory however the Russian Black Sea Fleet is mainly harbored in the Crimean port of Sevastopol. However I suspect that with all the turmoil going on in the Ukraine right now, the Russians will say that they're protecting their fleet in Sevastopol. This move by Russia is being condemned by both the EU and the United States. In fact right now the EU and US is attempting to determine what economic sanctions they can levy on Russia. The EU and US is attempting to throw Russia out of the G8. Time will tell if this works but in the meantime, it is the current geopolitical event and it is reeking havoc on markets worldwide....
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 higher and the US Dollar is advancing. 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 Friday April crude dropped to a low of 101.80 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 $103.09 a barrel and resistance at $104.77. Understand that this is due to the current crisis between Russia and the Ukraine. 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.
Last 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 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. 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.
Forex Crunch, a friend of Market Tea Leaves published an article on the Smart Money whereby we define who they are and what they do. This article can be viewed at:
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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