Good Morning Traders,
As of this writing 5:15 AM EST, here’s what we see:
US Dollar –Up at 80.695, the Dec US Dollar is up 72 ticks and is trading at 80.690.
Energies – January Oil is up at 97.25.
Financials – The December 30 year bond is down 12 ticks and trading at 131.09.
Indices – The December S&P 500 emini ES contract is up 10 ticks and trading at 1794.00.
Gold – The December gold contract is trading down at 1213.90 and is down 72 ticks from its close. Note: The front month for crude is now January "14. The front month for Gold is February'14.
Initial Conclusion: This is not a correlated market. The dollar is up+ and oil is up+ which is not 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 higher 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 mostly lower with the exception of the Shanghai exchange which traded fractionally higher. As of this writing all of Europe is trading higher.
Possible challenges to traders today is the following:
1. ADP Non-Farm Employment Change is out at 8:15 AM EST. This is major.
2. Trade Balance is out at 8:30 AM EST. This is major.
3. ISM Non-Manufacturing PMI is out at 10 AM EST. This is major.
4. New Home Sales is out at 10 AM EST. This is major.
5. Crude Oil Inventories is out at 10:30 AM EST. This could move the oil market.
6. President Obama Speaks at 11:20 AM EST. This is major.
7. Beige Book is out at 2 PM EST. This is major.
Currencies
Yesterday the Swiss Franc made it's move at around 10AM EST after the economic reports were released. The USD fell and 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 rise only lent confirmation to the move. As a trader you could have netted 20-30 plus ticks on this trade.
Charts Courtesy of Trend Following Trades
 |
| Swiss Franc - 12/13 - 12/3/13 |
 |
| USD - 12/13 - 12/3/13 |
Bias
Yesterday we said our bias was neutral as the markets weren't giving any clue as to direction. The Dow dropped 94 points and the other indices lost ground as well. Today we aren't dealing with a correlated market however our bias is to the upside. Why? The Bonds are trading lower, Crude is trading higher and after 3 consecutive days of losses we feel the market is ready for a rebound. Could this change? Of Course. Remember anything can happen in a volatile market.
Yesterday despite excellent vehicle sales the markets dropped for a 3rd day in a row (if you count Black Friday). It seems that all the hoopla was thrown prior to Thanksgiving as the markets haven't been showing it's hand in the early AM hours. I'm glad that vehicle sales have propelled forward but that's only to be expected in an era of low interest rates. It gives credence to the theory that there is in reality two economies: Wall Street and everything else. Markets at one time would rise and fall based on economic conditions (higher GDP, lower unemployment rates). That is not the case now. The Fed isn't in any position to consider tapering as the real economy ( you know, the one where things actually get made) isn't doing so terribly well. Pundits talk about 2.5% GDP as if it were nirvana yet we know that real prosperity means a 5% growth rate....
Given that we are discussing Auto Sales, the US experienced a growth of 16.4M versus 15.8M expected. This is a month over month annualized number. Audi as a luxury brand experienced their 35th month of consecutive growth in the US. Sales grew by 13.3 percent. Local to me in Princeton, NJ Princeton Audi reported a 20 growth in the month of November. Thes folks are dedicated to serving and servicing their customers. Apparently the old adage is true, take care of the customer and they'll take care of you....
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 higher and the US Dollar is advancing. 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. Last Wednesday January crude dropped to a low of 93.67 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 $96.10 a barrel and resistance at 98.53. 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 higher and the US Dollar is advancing. 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 10:30 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/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.
