Good Morning Traders,
As of this writing 5:10 AM EST, here’s what we see:
US Dollar –Down at 80.235, the US Dollar is down 143 ticks and is trading at 80.235.
Energies – March Oil is down at 99.93.
Financials – The March 30 year bond is up 4 ticks and trading at 133.04.
Indices – The March S&P 500 emini ES contract is down 1 tick and trading at 1824.00.
Gold – The April gold contract is trading down at 1308.30 and is up 82 ticks from its close.
Initial Conclusion: This is not a correlated market. The dollar is down- and oil is down which is not 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 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.
Asia traded mainly higher with the exception of the Nikkei and Singapore exchanges which traded lower. As of this writing all of Europe is trading higher.
Possible challenges to traders today is the following:
1. Import Prices m/m is out at 8:30 AM EST. This is major.
2. Capacity Utilization Rate is out at 9:15 AM EST. This is not major.
3. Industrial Production m/m is out at 9:15 AM EST. This is not major.
4. Prelim UoM Consumer Sentiment is out at 9:55 AM EST. This is major.
5. Prelim UoM Inflation Expectations is out at 9:55 AM EST. This is major.
Currencies
Yesterday the Swiss Franc made it's move at around 8:30 AM EST immediately after the Unemployment Claims numbers came in. 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 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
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| Swiss Franc - 03/14 - 2/13/14 |
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| USD - 03/14 - 2/13/14 |
Bias
Yesterday we said our bias was to the downside as the markets weren't correlated, Asia had traded down and Europe was trading down. The markets however had other plans as the Dow gained 64 points and the other indices gained as well. Today we aren't dealing with a correlated market and in fact the futures aren't giving any sense of direction, therefore our bias is neutral which means it go in any direction today. Could this change? Of Course. Remember anything can happen in a volatile market.
Yesterday we said our bias was to the downside as the markets weren't correlated, both Asia dn Europe were trading down and the US futures was pointed down. Whereas initially the markets opened lower, it became apparent after 10 AM that they were poised to rise. So what happened? None of the economic news met expectation. It was reported that Comcast is buying Time Warner AOL for a record 45 Billion Dollars and Wall Street loves mega-deals. It wasn't too long ago that we used to have "Merger Mondays" and most veteran traders used to avoid trading on Mondays for that very reason. Bottom line is that when we have mega-deals it's more appropriate to maintain a neutral bias as the markets don't operate with a sense of normalcy.
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 March crude dropped to a low of 99.48 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 $99.25 a barrel and resistance at $100.78. 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:
- 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 currently 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. Well the State of the Union come and gone yet to our knowledge Obama hasn't approved anything yet. He meets with Apple, Walmart and others to discuss joblessness yet he does absolutely nothing for the long term unemployed except to talk about it. Did anyone bother to tell that he could issue an Executive Order to extend? Yes, it may lead to absolutely nothing but at least the American people will know where he stands. His lack of leadership in this regard is deplorable...
As an update to this the Senate has voted to extend the Debt Ceiling limit until March, 2015. This is a clean extension without any hindrances. Obama has signed an Executive Order to increase the minimum wage of Federal workers. Too bad he didn't do anything for the rest of us.
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.
