Good Morning Traders,
As of this writing 5:40 AM EST, here’s what we see:
US Dollar –Up at 79.610, the US Dollar is up 42 ticks and is trading at 79.610. Energies – May Oil is down at 98.31.
Financials – The June 30 year bond is currently is down 9 ticks and trading at 133.06.
Indices – The June S&P 500 emini ES contract is up 42 ticks and trading at 1843.50.
Gold – The April gold contract is trading down at 1378.90 and is down 1 tick 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.
Asia traded mainly higher with the exception of the Nikkei and Hang Seng which traded higher. As of this writing all of Europe is trading higher. 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. Empire State Manufacturing Index is out at 8:30 AM EST. This is major.
2. TIC Long-Term Purchases is out at 9 AM EST. This is not major.
3. Capacity Utilization Rate is out at 9:15 AM EST. This is not major.
4. Industrial Production m/m is out at 9:15 AM EST. This is not major.
5. NAHB Housing Market Index is out at 10 AM EST. This is major.
Currencies
On Friday the Swiss Franc made it's move at around 8:30 AM EST immediately after the PPI numbers were reported. Look at the charts below and you'll see a pattern for both assets. The USD hit a high at around that time and fell. 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 about 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
As an add-on to the above video, we created a new one entitled How to Trade the Swiss Franc in a Volatile Market. I trust you'll find it interesting and thought provoking. It can be viewed at: http://youtu.be/6cCyR43Qb3Y
Charts Courtesy of Trend Following Trades
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| USD - June, 2014 - 3/14/14 |
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| USD - June, 2014 - 3/14/14 |
Bias
On Friday we said our bias was neutral as we felt that the markets could go in any direction. As such the Dow dropped 43 points and the other indices lost ground as well. Today we are not dealing with a correlated market however our bias is to the upside. Could this change? Of Course. Remember anything can happen in a volatile market.
On Friday we felt that the market was concerned more about geopolitical events as opposed to direction, hence our bias was neutral as we want to keep traders safe. A neutral bias also lends an additional level of volatility as it can go in any direction. The Dow went up, down, tried to go up but couldn't and remained down the rest of the session. At the beginning of last week it was China news making all the headlines but on Friday it was clearly the Russian-Ukraine crisis rearing its head again. On Sunday the people of Crimea will vote on whether to stay in the Ukraine or become part of the Russian Federation. Germany and the EU has already warns Russian President Putin that this is illegal and there will be consequences. US Secretary of State John Kerry has pretty much said the same. One thing is clear: regardless of the vote, this geopolitical event will be with us for some time......
As an update to this commentary, the people of Crimea voted on Sunday to become part of the Russian Federation. 93% of the vote favored being annexed by Russia and whereas the Western Powers have stated that this election is illegal; the markets worldwide have greeted this as positive news. It is rumored that economic sanctions against Russia may happen sooner as opposed to later.
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 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. On Friday May crude dropped to a low of 98.27 a barrel. 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 $97.81 a barrel and resistance at $99.37. 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 crude 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
On 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/aTgbhah_U4I
Future Challenges:
- Budget - Lat week it was revealed that President Obama has plans for salaried workers to get paid overtime if they work over 40 hours a week. The threshold is $455.00 a week; so if a salaried worker makes more than $455.00 a week then they'll be entitled to overtime pay. Pardon my saying so but are the folks in DC completely out of their minds? Their rational? Employers will be forced to hire more part time workers, thereby reducing the actual unemployment rate of 12.3%. So instead of focusing on growing the economy to make it more palatable to hire workers. let's force them to hire more part time workers. One of the reasons why the unemployment rate is so high is because most of those people can't work a part time job at minimum wage because it isn't enough to pay bills. In other words, it's not a living wage. This is another example of DC gone mad. First, employers will devise a workaround to this idea if it ever comes to light and secondly, this President should be more focused on growing the economy as opposed to looking at it from a finite point of view. While we're on the subject he should be looking at the "affordable" care act which quite frankly isn't so affordable. What do I mean? Yes, if you earn less than a certain amount of income you can get a subsidy to help pay for health insurance. But have you seen the out-of-pocket costs for those plans? In the Garden State you have a medical deductible, a hospital deductible and a total out-of-pocket deductible that if you're ever hospitalized will cost you dearly. Employers today can tell their workers to go out under Obamacare if they don't like what's offered. So what's offered? A high deductible plan with a low premium that employers don't pay 100% for. So the worker has to pay a premium for the plan and be saddled with a high deductible to boot. Employers will not have to pay a penalty for NOT offering insurance until 2016. This is not a good deal for the American worker and this President should have thought about what could happen before starting down this path. He can't raise the minimum wage and just now the Senate has voted on a plan to extend UI after months of deliberation.
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 daily newsletter dedicated to a trader's success. We discuss and teach 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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