Good Morning Traders,
As of this writing 5:25 AM EST, here’s what we see:
US Dollar –Down at 80.580, the Dec US Dollar is down 60 ticks and is trading at 80.580.
Energies – December Oil is down at 94.54.
Financials – The December 30 year bond is down 6 ticks and is trading at 133.25.
Indices – The December S&P 500 emini ES contract is down at 1757.75 and is down 21 ticks.
Gold – The December gold contract is trading down at 1312.40 and is down 23 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 up and the US dollar is trading higher 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 mixed with half the exchanges trading higher and the other half lower. As of this writing all of Europe is trading lower.
Possible challenges to traders today is the following:
1. ISM Non-Manufacturing PMI is out at 10 AM EST. This is major.
2. IBD/TIPP Economic Optimism is out at 10 AM EST. This is major.
Currencies
On Friday the Swiss Franc made it's move at around 9 AM EST. The USD hit a high at around that time and proceeded to drop, the Swiss Franc rose at the around the same time. The key to capitalizing on these trades is to watch the USD movement. The USD falling only lent confirmation to the move. Remember that when the markets rise, this will cause the USD to fall and the correlated asset to rise. As a trader you could have netted 20-30 ticks on this trade.
Charts Courtesy of Trend Following Trades
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| Swiss Franc - 12/13 - 11/4/13 |
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| USD - 12/13 - 11/4/13 |
Bias
Yesterday we said our bias was to the upside as the markets were nearly correlated. The Dow rose by 23 points and the other indices gained as well. Today we are not dealing with a correlated market as every major instrument is trading to the downside as of this writing. Hence our bias is neutral as the market have no sense of direction. Could this change? Of Course. Remember anything can happen in a volatile market.
Yesterday we said the major market mover would be Factory Orders and whereas they did not meet expectation, they did rise and this was greeted as positive news. The actual number came in at plus 1.7% versus a gain of 1.9% percent expected. This plus a correlated market helped propel the markets higher. The question is will this trend continue? Will we have a Holiday Rally this year? Last year it didn't seem so as we had the Fiscal Cliff and Hurricane Sandy to contend with. Time will tell if this holds true but at some point in early December the Congressional Committee will convene to discuss the budget situation. In all likelihood Congress will do what it always does and not come up with anything positive or constructive but it will probably come down to the last minute as it always does...
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
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.
Recently I had the opportunity to interview Mr. Michel Julien of Trader Crude Oil. Michel has a very interesting proposition. Michel is involved in crude oil trading and has been so for a number of years. His philosophy is to master one commodity and to become an expert at it. He is opening his trading room on November 4th and those that signup for it will have the chance to shadow his trades. The best news of all? His trading room is offered on a contributory basis, in other words you decide to pay what you think it's worth on a contributory basis. No spending hundreds of dollars a month only to find that it wasn't worth what you thought. This is an extremely unique value proposition and could potentially be a game-changer in the field of online subscription services. To view the article I've written on Michel, go to:
http://youtu.be/5ydpTVmsEwg
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 December crude dropped to a low of 94.06 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 $94.18 a barrel and resistance at 95.39. 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 - Forthcoming.
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 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 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.
Recently Published Articles:
http://www.barchart.com/headlines/story/12650453/are-the-markets-rewarding-poor-performance
http://www.traderplanet.com/commentaries/view/164874-trader-tips-the-case-for-fundamental-analysis/
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.
