Good Morning Traders,
As of this writing 5:05 AM EST, here’s what we see:
US Dollar –Down at 79.835, the US Dollar is down 32 ticks and is trading at 79.835. Energies – April Oil is up at 101.37.
Financials – The June 30 year bond is currently is down 1 tick and trading at 131.04.
Indices – The March S&P 500 emini ES contract is down 8 ticks and trading at 1876.00.
Gold – The April gold contract is trading down at 1332.50 and is down 57 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 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 lower and the US dollar is trading down which is not correlated. Gold is trading lower which is not 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 lower with the exception of the Indian Sensex exchange which traded higher. As of this writing Europe is trading mainly higher with the exception of the German DAX exchange which is fractionally lower. Please note: whereas the US markets are currently on Daylight Savings Time, this does not occur in Europe until March 30th. Instead of opening at 3 AM EST, for the next 3 weeks Europe doesn't open until an hour later at 4 AM EST.
Possible challenges to traders today is the following:
1. FOMC Member Plosser Speaks at 6:15 AM EST. This is major.
2. Lack of major economic news.
Currencies
On Friday the Swiss Franc made it's move at around 8:35 AM EST immediately after the Non-Farm Payroll numbers came out. Look at the charts below and you'll see a pattern for both assets. The USD hit a low at around that time and rose. In the meantime 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 rising only lent confirmation to the move. As a trader you could have netted 20-30 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 - 3/7/14 |
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| USD - 03/14 - 3/7/14 |
On Friday we said our bias was neutral as it was Jobs Friday and we always maintain a neutral bias on that day. The Dow gained 31 points however the Nasdaq lost 16 and the S&P gained 1. Today we are not dealing with a correlated market, however our bias is to the upside. Why? The USD and Bonds are trading lower, Europe is starting to trade higher and we don't have major economic news to drive the markets lower. Could this change? Of Course. Remember anything can happen in a volatile market.
On Friday we said our bias is neutral as it was Jobs Friday. Well the number came at 8:30 AM EST and it seems as though the US economy created 175,000 jobs versus 151,000 expected. No sooner did this happen when the headlines read 175,000 Jobs Created. What the headline failed to mention was the unemployment rate crept up to 6.7% versus 6.6% prior. Their reasoning? More people entered the workforce. Now if this were June or July I might buy that argument, however it is not; therefore I don't. My take: more people got laid off. Want proof?
Week Actual Claims Expectations Net
Feb 27 348K 333K -15,000
Feb 20 336K 335K -1,000
Feb 13 339K 331K -8,000
Total = -24,000
Now what did they tell us the difference was on Friday between actual versus expectation? 24,000. The fact is we aren't creating net new jobs. We're laying people off and hiring new ones. Perhaps the new ones will work for a lower wage or less benefits. Of course and as usual this report completely ignores the U6 rate which is the unemployment rate for the long term unemployed. That rate is 12.6%. Now some who read this may say "those people don't want to work". To which I would point and say that creating 175,000 jobs is fine but when about 12 million people need jobs, it doesn't do much nor does it go far enough. We need to create 500,000 net new jobs a month for an extended period of time.
Friday was also a volatile day in that the markets zoomed higher in the morning, went into negative territory and had to fight for a gain to end the day 31 points higher. A neutral bias also means an added level of volatility as the markets can't seem to make up it's mind in terms of direction......
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 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 April crude dropped to a low of 102.85 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 $100.72 a barrel and resistance at $103.03. 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.
If trading today consider doing so after 10 AM EST when the markets gives better direction. While we're on the subject of crude Futures Magazine has decided to print an article we produced on crude and how to trade it. That article can viewed at:
http://www.futuresmag.com/2014/03/01/trading-crude-with-stocks-and-time
Last Wednesday crude oil inventory numbers was released and crude dropped 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/eEnJ76nr9wM
Future Challenges:
- Budget - It was revealed that President Obama is proposing 56 Billion in spending above the agreed upon amount in the bipartisan budget deal and will pay for by eliminating tax breaks for high net worth individuals. No doubt the GOP will combat this under the guise of "class warfare". What they forget to mention is they've been waging class warfare for the past 30 years. Trickle down doesn't trickle down, it pretty much stays where it is. Obama is playing this fairly close to the vest as he only has 3 days to get a budget approved. Does he think he can push it thru at the last minute or will he stonewall Congress into approving his version of a budget? It seems funny to me that two months ago Emergency Unemployment Compensation ended, no one has made any issue of this as it died in Congress. Did he sign an Executive Order? No. Yet everyone believes the rate is 6.7%, when in reality it's closer to 12.6%. Time will tell how this all works out.....
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. 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: http://www.forexcrunch.com/who-are-the-smart-money-and-what-do-they-do/
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.
