Good Morning Traders,
As of this writing 5:50 AM EST, here’s what we see:
US Dollar –Up at 80.180, the US Dollar is up 15 ticks and is trading at 80.180.
Energies – April Oil is up at 102.09.
Financials – The March 30 year bond is down 3 ticks and trading at 133.17.
Indices – The March S&P 500 emini ES contract is up 15 ticks and trading at 1850.00.
Gold – The April gold contract is trading down at 1340.10 and is down 27 ticks from its close.
Initial Conclusion: This is not a correlated market. The dollar is up+ and oil is up+ which is not normal but 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 higher and the US dollar is trading up which is not correlated. Gold is trading lower which is 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.
Asia traded mixed with about half the exchanges trading higher and the other half lower. As of this writing Europe is mainly trading lower with the exception of the Spanish IBEX and Italian Milan exchanges.
Possible challenges to traders today is the following:
1. New Home Sales is out at 10 AM EST. This is major.
2. Crude Oil Inventories is out at 10:30 AM EST. This could move the crude market.
Currencies
On Friday the Swiss Franc made it's move at around 10 AM EST after the Consumer Confidence numbers came out. 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 - 2/25/14 |
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| USD - 03/14 - 2/25/14 |
Yesterday we said our bias was to the downside as crude was lower, the Bonds were higher and Gold was trading down. This is not indicative of a market that's looking to go higher. As such the Dow dropped 27 points and the other indices lost ground as well. Today we aren't dealing with a correlated market but our bias is to the upside. Why? Crude is higher and the Bonds are lower. Could this change? Of Course. Remember anything can happen in a volatile market.
Yesterday we woke up and learned that the Mt Gox exchange virtually disappeared overnight. Each day we provide commentary and guidance on currencies, specifically the Swiss Franc versus the US Dollar. In the past we've also commented on the Canadian Dollar and Japanese Yen. We've resisted the temptation of commenting on the Bitcoin as it never made any sense to us. The Bitcoin was never a real currency to begin with as it was a "cyber-currency" only to used in cyberspace. There was never any regulation or governance with bitcoins. It was never weighed against the USD as does every other currency and as such in or mind wasn't real. Bitcoins became popular after the Cyprus crisis from last year; I guess as a way and means of augmenting losses that people endured when the crisis came to the forefront. Obviously it didn't work. This scenario reminds me of the famous tulip situation that started in Holland in the 1600's. The Dutch viewed tulips as a "currency" and an asset and sold property to buy tulips. Clearly this didn't work too well. We view Bitcoins in the same vein and never bought into the notion that it would one day become a real currency. The bottom line is if it isn't regulated and traded on a formal exchange and isn't weighed against another major currency (USD or Euro, etc.); it isn't real and don't buy the hype....
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 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. Yesterday April crude dropped to a low of 101.02 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 $101.61 a barrel and resistance at $102.55. 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 - 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.
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.
