Good Morning Traders,
As of this writing 5:30 AM EST, here’s what we see:
US Dollar –Up at 80.150, the US Dollar is up 33 ticks and is trading at 80.150. Energies – April Oil is down at 101.36.
Financials – The June 30 year bond is down 2 ticks and trading at 132.10.
Indices – The March S&P 500 emini ES contract is up 13 ticks and trading at 1875.75
Gold – The April gold contract is trading down at 1335.70 and is down 46 ticks from its close.
Initial Conclusion: This is not a correlated market. The dollar is up+ and oil is down- which is 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.
All of Asia traded higher. As of this writing all of Europe is trading higher.
Possible challenges to traders today is the following:
1. Challenger Job Cuts y/y is out at 7:30 AM EST. This is not major.
2. FOMC Member Dudley Speaks at 8:15 AM EST. This is major.
3. Unemployment Claims is out at 8:30 AM EST. This is major.
4. Revised Nonfarm Productivity q/q is out at 8:30 AM EST. This is not major.
5. Revised Unit Labor Costs q/q is out at 8:30 AM EST. This is not major.
6. Factory Orders m/m are out at 10 AM EST. This is major.
7. Natural Gas Storage is out at 10:30 AM EST. This will move the Nat Gas market.
8. FOMC Member Plosser Speaks at 1 PM EST. This is major.
Currencies
Yesterday the Swiss Franc made it's move at around 9:50 AM EST at around the time the ISM numbers came out. Look at the charts below and you'll see a pattern for both assets. The USD hit a high at around that time and dropped. In the meantime 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 fall 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 - 3/5/14 |
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| USD - 03/14 - 3/5/14 |
Bias
Yesterday we said our bias was to the downside as the markets weren't correlated. The net result? The Dow dropped 36 points, the Nasdaq gained 6 and the S&P was flat for the day. Today we aren't dealing with a correlated market and our bias is neutral. A neutral bias means the markets could go in any direction today. Could this change? Of Course. Remember anything can happen in a volatile market.
Yesterday morning the futures weren't correlated and in fact looked correlated to the downside. The European markets were trading down and it looked to us as though the Smart Money was looking to take capital off the table after the huge run up on Tuesday. The headlines of some periodicals stated "Don't Short This Market" written by a supposed expert. Well that may be the case for the next 6 months down the road but as day traders we need to know the here and now. The economic news was not too stellar as none of the major reports exceeded expectation. The ADP Non-Farm Employment change came in at 139,000 versus 159,000 expected. Today we get Challenger Job Cuts at 7:30 AM EST. We'll also have 8 economic reports today with about half of them considered major. Lastly the ECB will determine the Minimum Bid Rate which is the equivalent of the Federal Funds Rate (aka Overnight Rate) in the United States. They will also conduct a press conference at 8:30 AM EST. I mention this because depending upon what they say it could drive the Euro in any direction which in turn will cause the USD to fluctuate either up or down. This of course could have an impact on the US markets. Just something to be mindful of......
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 advancing. This is 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 100.85 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 $100.73 a barrel and resistance at $101.97. 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
Yesterday the 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 6.6%, when in reality it's closer to 12.3%. Time will tell how this all works out.....
Crude oil is trading lower and the US Dollar is advancing. This is 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.
