As of this writing 5:10 AM EST, here’s what we see:
US Dollar –Down at 81.960, the Dec US Dollar is down 57 ticks and is trading at 81.960.
Energies – October Oil is up at 107.81.
Financials – The December 30 year bond is up 7 ticks and is trading at 129.01
Indices – The September S&P 500 emini ES contract is down at 1682.25 and is down 1 tick.
Gold – The October gold contract is trading up at 1366.70 and is up 30 ticks from its close.
Initial Conclusion: This is not a correlated market. The dollar is down- and oil is up+ which is 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 up and the US dollar is trading higher 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 closed mainly lower with the exception being the Nikkei and Shanghai exchanges which closed fractionally higher. As of this writing Europe is trading mainly higher with the exception being the London and Paris exchange which is trading fractionally lower.
Possible challenges to traders today is the following
1. Wholesale Inventories are out at 10 AM EST. This is not major.
2. Crude Oil Inventory is out at 10:30 AM EST. This will move the crude markets.
3. 10 Year Bond Auction starts at 1 PM EST. This could effect afternoon trading.
Currencies
Yesterday the
Swiss Franc made it's move at just before 8 AM EST with no economic news at all.
As with Monday's session the USD hit a high at around 8 AM EST and the Swiss Franc took off at
around the same time. The USD falling only lent confirmation to the move. As a trader you
could have netted 20-30 ticks
on this trade. And you thought markets weren't correlated?
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| Chart Courtesy of Trend Following Trades |
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| USD 9/10/13 |
Bias
Yesterday we said our bias was to the upside as the Bonds were trading lower, Asia had closed higher and Europe was trading higher. As such the Dow closed up 128 points and the indices gained ground as well. Today we are not dealing with a correlated market however our bias is to the upside. Why? The USD is trading lower which is typically bullish for the markets and Gold is trading higher. This shows correlation and additionally Crude is trading higher which is correlated with the USD trading lower. This shows bullish correlation. The Asian did not close higher but they fall off a cliff either; Europe is mainly trading higher with London and Paris fractionally lower. We don't have major economic news that could drive the US markets lower. Could this change? Of Course. Remember anything can happen in a volatile market.
Yesterday the markets moved based on two factors: the news that Syria had agreed to Russia's proposal to surrender it's chemical weapons to the international community and thereby avert any American military aggression and the announcement that Apple was releasing two new I-Phones which are reported to be less expensive. On the latter I must profess ignorance as I don't own an I Phone. On the former President Obama will be addressing the American people at 9 PM EST this evening (it is Tuesday afternoon as I write this) to discuss Syria and hopefully he will address the Russian proposal at this time. It is shortly after 9 PM EST and President Obama has just finished his speech on Syria. Apparently he is willing to allow diplomacy to play it's hand as he is sending Secretary of State John Kerry to Russia to work out the details for the surrender of chemical weapons from Syria. But he also remained open to the idea of a military strike just in case diplomacy doesn't work. I think its safe to say that Russia and Syria had better not be bluffing when it comes to the surrender of chemical weapons. John Kerry is a war veteran and he won't be easily fooled. Time will tell if this all works out but in the meantime we'll have to take it day-by-day...
Many 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
http://www.traderplanet.com/commentaries/view/164874-trader-tips-the-case-for-fundamental-analysis/
TraderPlanet published an article I produced called The Case for Fundamental Analysis. Feel free to visit and provide any comments you may have. In case you weren't aware Market Correlation is mainly fundamental analysis specific to Futures and the Futures markets.
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.
In May, I spoke with John Karnas, CEO of Trend Following Trades. John has an interesting background as he was a trader for a number of years prior to buying Trend Following Trades. John is a believer in Trading Plans and has a very precise method of developing aspiring traders. To download the article I've written, go to:
https://markettealeaves.sharefile.com/d/s0e8e37fe5944fc79
My discussion with John can be viewed at: http://youtu.be/uVwHpMq1604
Please note the video is about a half hour in length and we plan on producing more in the near future. Also note that in the near future we will have other videos where we will interview various trading leaders.
As I write this the crude markets are trading higher and the US Dollar is declining. 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 October crude dropped to a low of 106.42 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 $106.01 a barrel and resistance at 109.13. 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 Battle - ongoing.
- Debt Ceiling in the September time frame.
- Military Action in Syria - September.
Crude oil is trading higher and the US Dollar is declining. This is normal. Crude typically makes 3 major moves (long or short) during the course of any trading day: around 7 AM EST, 9 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 10:30 AM when the inventory numbers are released and 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.
Recently Published Articles:
http://www.barchart.com/headlines/story/10598425/when-perception-becomes-reality
http://www.barchart.com/headlines/story/12241621/syria-turmoil-stirs-markets
http://www.forexcrunch.com/leadership-or-lack-thereof-part-ii/
http://www.traderslog.com/john-karnas/
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.
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