Good Morning Traders,
As of this writing 5:20 AM EST, here’s what we see:
US Dollar –Down at 80.630, the US Dollar is down 27 ticks and is trading at 80.740. Energies – March Oil is down at 96.81
Financials – The March 30 year bond is down 10 ticks and trading at 132.10.
Indices – The March S&P 500 emini ES contract is up 16 ticks and trading at 1792.25.
Gold – The February gold contract is trading up at 1254.60 and is up 38 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 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.
Asia traded mainly higher with the exception of Sensex and Singapore with traded slightly higher. As of this writing all of Europe is trading higher.
Possible challenges to traders today is the following:
1. Crude Oil Inventories is out at 10:30 AM EST. This could move the crude markets. 2. FOMC Statement is out at 2 PM EST. This is major.
3. Federal Funds Rate is out at 2 PM EST. This is major.
Currencies
Yesterday the Swiss Franc made it's move at around 8:30 AM EST after the Core Durable Goods numbers were released. Look at the charts below and you'll see a pattern for both assets. The USD fell 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 drop 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
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| Swiss Franc - 03/14 - 1/28/14 |
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| USD - 03/14 - 1/28/14 |
Bias
Yesterday we said our bias was to the upside as the Bonds were trading lower. crude was trading higher and Europe was also trading higher. The markets didn't disappoint as the Dow gained 91 points and the other indices gained as well. Today we aren't dealing with a correlated market and ordinarily I would say the market is poised to go higher except today is FOMC Day and for those subscribers who've been with me awhile; I always maintain a neutral bias on this day. Could this change? Of Course. Remember anything can happen in a volatile market.
Well we said the markets had the ability to rise yesterday and they didn't disappoint. Whereas Durable Goods and Core Durable Goods fell, the S&P Home Pricing Index met expectation and beat the previous number by one tenth of one percent proving that the home/real estate market is still viable. Consume Confidence also which didn't hurt matters either. Today we have the FOMC meeting which marks Ben Bernanke's last meeting before leaving office. Needless to say I don't think the Fed will change its low interest rate policy although I do think they may taper. Time will tell if this is the case...
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. Yesterday March crude dropped to a low of 95.71 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 $96.90 a barrel and resistance at $98.03. 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.
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 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 last 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.
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.
