Good Morning Traders,
As of this writing 5:00 AM EST, here’s what we see:
US Dollar –Down at 81.285, the US Dollar is down 185 ticks and is trading at 81.285. Energies – March Oil is down at 96.92
Financials – The March 30 year bond is up 4 ticks and trading at 133.23.
Indices – The March S&P 500 emini ES contract is down 9 ticks and trading at 1774.25.
Gold – The February gold contract is trading up at 1244.50 and is up 44 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 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 down which is not 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 lower.
Possible challenges to traders today is the following:
1. Treasury Sec Lew Speaks at 9 AM EST. This is major.
2. Final Manufacturing PMI is out at 9 AM EST. This is not major.
3. ISM Manufacturing PMI is out at 10 AM EST. This is major.
4. Construction Spending m/m is out at 10 AM EST. This is major.
5. ISM Manufacturing Prices is out at 10 AM EST. This is not major.
6. Total Vehicle Sales. All Day.
On Friday the Swiss Franc made it's move at around 10 AM EST after all the economic news was released. Look at the charts below and you'll see a pattern for both assets. The USD dropped 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 rise only lent confirmation to the move. As a trader you could have netted 20-30 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
|Swiss Franc - 03/14 - 1/31/14|
|USD - 03/14 - 1/31/14|
On Friday we said our bias was to the downside as the markets were nearly correlated to the downside and Europe was trading lower across the board. The Dow dropped 150 points and the other indices lost ground as well. Today we are not dealing with a correlated market and our bias is to the downside. Why? The Bonds are trading higher, Crude is trading lower, Asia traded lower and currently Europe is trading lower. Could this change? Of Course. Remember anything can happen in a volatile market.
This entire month of January has been fraught with one issue after another. At first I think everyone thought the sell off was part of the "January Effect" and then some others thought it was weather related as we're still in the midst of the "polar vortex" but then companies started to report earnings that weren't too stellar. Case-in-point: Apple. So what's happening? What's really going on? A few things really. First and foremost we're in the midst of a market correction; which is what can happen when the markets go up too fast, too soon. We witnessed this in 2013 and saw a Santa Claus rally that we hadn't seen in a number of years. Secondly firms aren't reporting "out of the ballpark" earnings. They're reporting OK earnings at best. The markets aren't used to this. Lastly we still have the budgets and debt ceiling issues to deal with. I suspect that today Secretary of Treasury Lew will discuss in-depth the emphasis on raising the debt ceiling or else. Time will tell if this is correct but one thing remains true. No one rings a bell when the market hits bottom and says enough, time to go long as no one knows when that will be. So we take it one day at a time and strive to determine market direction on a daily basis....
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:
Many 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:
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:
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 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. On Friday March crude dropped to a low of 97.10 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 $96.31 a barrel and resistance at $98.67. 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.
- Debt Ceiling - Well we could say it's official and that a "budget" has been passed by both houses of Congress but Obama still has yet to approve it. If approved this would fund the government until September 30th and remove an uncertainty from the markets. However Obama hasn't approved this yet and current Secretary of the Treasury Jack Lew has already testified before Congress warning that our current debt ceiling will expire on February 7th and that the Treasury could do something to extend until the end of February but won't be able to go much beyond that. Now it may be that Obama is waiting until after he gives his State of the Union address on Tuesday evening before he commits to anything. This is purely subjective on my part but it would make sense. We'll have to monitor and see. As an update to this the President gave his State of the Union address Tuesday night and ironically he does bring forth some very good ideas. I especially liked the MyRa or My IRA. It would strengthen the markets and have more people invested in it. However I'm concerned about his ability to implement it as he has great ideas but not the where with-all to implement. One thing you have to say about this President, he does know how to deliver a speech. Today Secretary Lew will speak at 9 AM EST and I have no doubt he'll be discussing the looming debt ceiling issue. Officially the debt ceiling will be met by February 7th but the Treasury will engineer some moves to extend the ceiling until later in February.
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 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.
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.