Good Morning Traders,
As of this writing 5:05 AM EST, here’s what we see:
US Dollar –Down at 80.880, the Dec US Dollar is down 237 ticks and is trading at 80.880.
Energies – January Oil is down at 95.19.
Financials – The December 30 year bond is down 1 tick and trading at 131.08.
Indices – The December S&P 500 emini ES contract is unchanged and trading at 1793.75.
Gold – The December gold contract is trading down at 1242.70 and is down 9 ticks from its close. Note: The front month for crude is now January "14.
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 unchanged and the US dollar is trading lower 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 mainly mixed with half the exchanges trading lower and the other half higher. As of this writing all of Europe is trading higher.
Possible challenges to traders today is the following:
1. FOMC Member George Speaks at 8:40 AM EST. This is major
2. JOLTS Job Openings is out at 10 AM EST. This is major.
3. FOMC Member Tarullo Speaks at 12:40 PM EST. This is major.
Currencies
Yesterday the Swiss Franc made it's move at around 10 AM EST after the Philly Fed Manufacturing Index report was released. Subsequently the USD fell, the markets rose and so did the Swiss Franc. This was a long opportunity on the Swiss Franc. The key to capitalizing on these trades is to watch the USD movement. The USD rise only lent confirmation to the move. As a trader you could have netted 20 ticks on this trade.
Charts Courtesy of Trend Following Trades
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| Swiss Franc - 12/13 - 11/21/13 |
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| USD - 12/13 - 11/21/13 |
Bias
Yesterday we said our bias was neutral as we had 10 economic reports, most of which were major. The Dow rose 109 points and this time stayed above the 16000 level. Today the markets aren't correlated however our is to the upside. Why? The USD and Bonds are both trading lower as of this writing and that is bullish. Could this change? Of Course. Remember anything can happen in a volatile market.
Yesterday we said our bias was neutral as we had 10 economic reports, most of which were major. Only this time the markets rose above the 16,000 level and stayed there into the close. The other indices rose as well. So what happened? Well the Philly Fed Manufacturing Index was released at 10 AM and as we stated in our Market Bias video this is a major report and proven market mover. The report came in negative and remember as of late the markets advance on negative news due to tapering fears. The Dow advanced and never looked back. This is very much a news driven, event driven market that has no sense of normalcy. Today for the first time in a few days we don't really have any major news driving the markets so we'll have to see if the Dow stays above the 16,000 level or will it lose ground? Time will tell....
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 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 January crude dropped to a low of 93.47 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 $93.86 a barrel and resistance at 96.32. 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 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 economic reports 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/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.
