As of this writing 5:40 AM EST, here’s what we see:
US Dollar – Down at 81.115, the US Dollar is down 47 ticks and is trading at 81.115. Energies – February Oil is up at 92.82
Financials – The March 30 year bond is up 2 ticks and trading at 128.27.
Indices – The March S&P 500 emini ES contract is up 25 ticks and trading at 1838.50.
Gold – The February gold contract is trading up at 1226.00 and is up 5 ticks from its close.
Initial Conclusion: This is not a correlated market. The dollar is down- and oil is up+ which is normal but 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 higher and the US dollar is trading down which is correlated. Gold is trading higher which is 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 lower. As of this writing all of Europe is trading higher.
Possible challenges to traders today is the following:
1. Unemployment Claims are out at 8:30 AM EST. This is major.
2. Natural Gas Supplies are out at 10:30 AM EST. This could move the Nat Gas market.
3. 30-y Bond Auction starts at 1 PM EST.
4. Challenger Job Cuts are out at 7:30 AM EST. This is major.
Currencies
Yesterday the Swiss Franc made it's move at around 10:15 AM EST with no major economic news to speak of. 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 20-30 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. We finally have charts that we can show.
Charts Courtesy of Trend Following Trades
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| Swiss Franc - 3/14 - 1/8/14 |
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| USD - 3/14 - 1/8/14 |
Bias
Yesterday we said our bias was to the downside as the USD was trading lower, Europe was lower and the US Futures were pointed lower. As expected the market fell and the Dow dropped 68 points. The S&P dropped by 1 but the NASDAQ showed a gain of 13 points. Today we are not dealing with a correlated market however our bias is to the upside. Why? The USD is trading down, oil is higher, Gold is higher, Europe is higher and the US Futures are pointed up. Could this change? Of Course. Remember anything can happen in a volatile market.
With all the fanfare regarding the FOMC Meeting Minutes, it apparently did nothing for the markets. The bigger question is why? Usually when the FOMC announces its meeting minutes, it's generally a market mover. So what happened? The minutes themselves didn't say anything that we didn't already know; that being that the Fed is tapering off the Quantitative Easing program. This was a very cut and dry report as there's no guessing as to what the Fed meant or what did they really mean? Notice that despite the fact that the ADP report came out at 8:15 AM EST to very good numbers, the markets opened lower and stayed there the rest of the session. There was no rebound to parity after the meeting minutes were released. This should tell you that there's something to this market correlation stuff we keep talking about. Today we have Unemployment Claims which is always a major report but we also have the ECB Minimum Bid rate which is the equivalent to our Overnight Rate. This could move the European market which in turn could have an impact on the US markets.
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 declining. 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 February crude dropped to a low of 92.26 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 $92.02 a barrel and resistance at $93.27, so there doesn't seem to be any race to $100 a barrel. 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. Now this same bill has to be voted on in the House of Representatives.
Crude oil is trading higher and the US Dollar is declining. 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. 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.
