Good Morning Traders,
As of this writing 5:35 AM EST, here’s what we see:
US Dollar – Up at 81.075, the US Dollar is up 54 ticks and is trading at 81.075. Energies – March Oil is up at 94.56.
Financials – The March 30 year bond is up 3 ticks and trading at 131.06.
Indices – The March S&P 500 emini ES contract is up 22 ticks and trading at 1841.75.
Gold – The February gold contract is trading up at 1241.60 and is up 14 ticks from its close.
Initial Conclusion: This is not a correlated market. The dollar is up+ and oil is up+ which is not normal and 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 higher and the US dollar is trading up which is not correlated. Gold is trading higher which is not 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 lower with the exception of the Hang Seng and Singapore exchanges which traded higher. As of this writing all of Europe is trading higher.
Possible challenges to traders today is the following:
1. Building Permits is out at 8:30 AM EST. This is major.
2. Housing Starts is out at 8:30 AM EST. This is 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. Prelim UoM Consumer Sentiment is out at 9:55 AM EST. This is major.
6. Prelim UoM Inflation Expectations is out at 9:55 AM EST. This is major.
7. JOLTS Job Openings is out at 10 AM EST. This is major.
Currencies
Yesterday the Swiss Franc made it's move at around 8:35 AM EST after the Unemployment Claims was posted. Look at the charts below and you'll see a pattern for both assets. The USD fell at around that time 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 drop only lent confirmation to the move. As a trader you could have netted 20-30 ticks on this trade. 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
Charts Courtesy of Trend Following Trades
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| Swiss Franc - 03/14 - 1/16/14 |
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| USD - 03/14 - 1/16/14 |
Bias
Yesterday we said our bias was to the upside as both the Bonds and USD were trading were lower. Well the Dow dropped 65 points but the Nasdaq gained 4. Today we aren't dealing with a correlated market however our bias is to the upside. Why? Europe is trading higher, the US futures are pointing higher and Gold is higher. Could this change? Of Course. Remember anything can happen in a volatile market.
Yesterday in what should have been a day of gains, it turned into a day of losses. The fly in the ointment? The NAHB Housing Market Index number. It appears that housing and real estate still have the same hold on the markets that they've always had. The number came in at 56 versus 58 which unto itself isn't too bad but the markets didn't quite see it that way. All other reports: CPI, Core CPI, Philly Fed Manufacturing Index either met expectation or exceeded it. Today we once again have the boatload of economic reports and while we're on the subject can someone kindly inform Ben Bernanke to stop scheduling news conferences during trading hours only to defend or justify your actions? We get it Ben, you did great things in 2008. But guess what? It's time to go and if you want to discuss 2008; write a book. I guarantee you it'll be a bestseller....
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. Yesterday February crude dropped to a low of 93.60 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 $93.04 a barrel and resistance at $94.95, so there's no race to $100 a barrel. 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 - Well it's official, the Senate has finally passed a Budget Bill (after House approval) and this bill will now go to President Obama for approval. The question is will he approve it? Will he approve it knowing that this bill contains no assistance for the long-term unemployed? Passage of this bill would negate the notion of any long-term budget issue as it would fund the US Government until September 30th or the balance of this fiscal year. The one thing I'm not getting is if this President was so concerned about this issue, why did he wait until millions of people got thrown off UI before taking any action? He knew that on December 28th millions would be affected by this yet he did nothing. He also knew that in December this bill was approved and didn't contain any provision to extend benefits yet he did nothing. And if he didn't know, then he should have known. This President has to be the worse negotiator I've ever seen in my life. He seems perfectly content to allow government to run on autopilot with no input from his branch of government. He reminds me of a Mayor we had in New York in the 1980's: Peter Dinkins. He was the worse Mayor the city ever had and it took Rudy Giuliani years to clean up his mess. This past week the Senate bill to extend UI benefits failed because it required a majority vote of 60 to pass and came in at 55. In the meantime millions are wondering how they're going to put food on their table and if they have children, it's even worse....
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 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.
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.
