Good Morning Traders,
As of this writing 5:15 AM EST, here’s what we see:
US Dollar –Down at 80.045, the US Dollar is down 45 ticks and is trading at 80.045. Energies – April Oil is down at 103.85.
Financials – The March 30 year bond is down 12 ticks and trading at 134.25.
Indices – The March S&P 500 emini ES contract is up 49 ticks and trading at 1855.25.
Gold – The April gold contract is trading down at 1339.30 and is down 110 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 higher and the US dollar is trading down which is 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.
All of Asia traded traded higher with the exception of the Shanghai exchange which traded lower. As of this writing all of Europe is trading higher.
Possible challenges to traders today is the following:
1. IBD/TIPP Economic Optimism is out at 10 AM EST. This is major.
Currencies
Yesterday the Swiss Franc made it's move at around 8:45 AM EST after the economic news was released. Look at the charts below and you'll see a pattern for both assets. The USD rose at around that time and the Swiss Franc fell. This was a shorting 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 20 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
Charts Courtesy of Trend Following Trades
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| Swiss Franc - 03/14 - 3/4/14 |
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| USD - 03/14 - 3/4/14 |
Yesterday we said our bias was to the downside as the futures were correlated to the downside and the markets were shaken by the news from the Ukraine. The net result? The Dow dropped 154 points and the other indices lost ground as well. Today we aren't dealing with a correlated however our bias is to the upside. Why? Unlike yesterday whereby each instrument was trading up, today they're trading down. This is usually the sign of a reversal. Could this change? Of Course. Remember anything can happen in a volatile market.
Yesterday despite all the good economic news the markets were driven by the geopolitical events taking place in the Crimea between the Ukraine and Russia. Yesterday we had 9 economic reports, most of which was major and all the news either met or exceeded expectation yet the worldwide markets were only focused on the crisis in the Crimea. Gold and oil soared to levels not seen in a while and whereas the EU and United States are seeking to levy economic sanctions against Russia but I have no doubt the Russian government will say that it's protecting the Russian Fleet in Sevastopol. This is the nature of a geopolitical crisis. For the time being the world is focused on it but once the situation stabilizes the markets will return to normal. Oil and Gold will probably retreat and return to normal or at the very least stabilize, but time will tell when that happens...
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 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 April crude dropped to a low of 103.76 a barrel but maintained the $100 a barrel mark. 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 $103.61 a barrel and resistance at $104.77. Understand that this is due to the current crisis between Russia and the Ukraine. 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.
Last Wednesday crude oil inventory numbers was released and crude jumped 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/9VZRInAPusg
Future Challenges:
- Budget - It was revealed that President Obama is proposing 56 Billion in spending above the agreed upon amount in the bipartisan budget deal and will pay for by eliminating tax breaks for high net worth individuals. No doubt the GOP will combat this under the guise of "class warfare". What they forget to mention is they've been waging class warfare for the past 30 years. Trickle down doesn't trickle down, it pretty much stays where it is. Obama is playing this fairly close to the vest as he only has 3 days to get a budget approved. Does he think he can push it thru at the last minute or will he stonewall Congress into approving his version of a budget? It seems funny to me that two months ago Emergency Unemployment Compensation ended, no one has made any issue of this as it died in Congress. Did he sign an Executive Order? No. Yet everyone believes the rate is 6.6%, when in reality it's closer to 12.3%. Time will tell how this all works out.....
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. 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 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.
