Yellen Speaks - Finally!

Good Morning Traders,
As of this writing 4 AM EST, here’s what we see:
US Dollar: Sept. USD is Down at 94.590.
Energies: October Crude is Up at 47.39.
Financials: The Sept 30 year bond is Up 6 ticks and trading at 171.29.
Indices: The Sept S&P 500 emini ES contract is 5 ticks higher and trading at 2174.75.
Gold: The October gold contract is trading Up at 1324.30. Gold is 31 ticks higher than its close.
Initial Conclusion

This is not a correlated market. The dollar is Down- and crude is Up+ which is normal but 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 Up and Crude is trading Higher which is not correlated. Gold is trading Up which is 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 lower and the other half higher. As of this writing Europe is trading lower at this hour.

Possible Challenges To Traders Today

– Prelim GDP q/q is out at 8:30 AM EST. This is major.
– Prelim GDP Price Index q/q is out at 8:30 AM. This is major.
– Goods Trade Balance is out at 8:30 AM. This is major.
– Fed Chair Yellen Speaks at 10 AM EST. This is major.
– Revised UoM Consumer Sentiment is out at 10 AM EST. This is not major.
– Revised UoM Inflation Expectations is out at 10 AM EST. This is not major.
– Jackson Hole Symposium – All Day. This is major.
Gold

We’ve elected to switch gears a bit and show correlation between Gold and The YM futures contract. The YM contract is the DJIA and the purpose is to show reverse correlation between the two instruments. Remember it’s liken to a seesaw, when up goes up the other should go down and vice versa.
Yesterday Gold made it’s move at around 8:45 AM EST after the 8:30 economic news was reported. Gold hit a low at around that time and the YM hit a high. If you look at the charts below Gold gave a signal at around 8:45 AM EST and the YM was moving lower at the same time. Look at the charts below and you’ll see a pattern for both assets. Gold hit a low at around 8:45 AM EST and the YM hit a high. These charts represent the latest version of Trend Following Trades and I’ve changed the timeframe to a 15 minute chart to display better. This represented a long opportunity on Gold, as a trader you could have netted about 30 plus ticks per contract on this trade. Each tick is worth $10. We added a Donchian Channel to the charts to show the signals more clearly.
Charts Courtesy of Trend Following Trades built on a NinjaTrader platform
Click on an image to enlarge it.
Gold – October, 2016 – 8/25/16
YM- September, 2016 – 8/25/16

Bias

Yesterday we gave the markets a downside bias as both Crude and the Bonds were trading higher yesterday morning and this does bode well for a upside day. The markets didn’t disappoint as the Dow dropped 33 points and the other indices lost ground as well. Today we aren’t dealing with a correlated market and our bias is neutral.
Could this change? Of Course. Remember anything can happen in a volatile market.
Commentary

Yesterday we received good economic news but unlike other days this week where we received good economic news; this did not go according to plan. Durable Goods, Core Durable Goods came in better than expected and the Unemployment Claims were down but this was not enough to propel the markets forward. All week long we’ve been waiting for some sign from the Fed as to what the future holds for rate hikes and thus far we’ve received nothing. Today Jane Yellen speaks at 10 AM EST and it is hoped that she can provide some measure of assurance or stability to an already unstable market…
Just so you understand, Market Correlation is Market Direction. It attempts to determine the market direction for that day and it does so by using a unique set of tools. In fact TradersLog published an article on this subject that can be viewed at:
http://www.traderslog.com/market-cor…ket-direction/

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:
View article on Futures Mag
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:
View article on Futures Mag
Many subscribers have asked what is the best time of day to trade? A recent article published by Futures Magazine may shed some light on the subject:
http://www.futuresmag.com/2015/01/15…orning-trading

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.

As I write this the crude markets are higher and the futures are trading higher. This is not normal. Crude and the markets are now reverse correlated such that when the markets are rising, crude drops and vice-versa. Yesterday October Crude dropped to a low of $46.51 a barrel. It would appear at the present time that crude has support at $46.24 a barrel and resistance at $48.22. This could change. We’ll have to monitor and see. Remember that crude is the only commodity that is reflected immediately at the gas pump. On Friday, December 4th OPEC reiterated their stance not to cut production. OPEC appears to be adamant about keeping production where it is as they believe that oil will rebound. What they haven’t figured out yet is that the more countries like Canada and the US produce their own crude (by whatever means) the more crude prices will fall.
Last May OPEC reiterated it’s stance not to cut production. The problem? Iran refused to cut production (as they are recently recovering from sanctions levied against them) and therefore no agreement was made. Could this change in the future? Of course, anything can happen in a volatile market.
If trading crude today consider doing so after 10 AM EST when the markets gives us better direction.

Future Challenges

Hillary Clinton has decided to release her income tax data in an attempt to force Donald Trump to do the same. This may work or not. A billionaire’s tax return is far more complex than any one of us would like to think. In all likelihood it would probably take a tax attorney to decipher it. Hillary Clinton is leading Donald Trump in many key battleground states.
Donald Trump in the meantime is continuing his name calling campaign but as of yet has not told anyone how he’s going to do the things he says he’ll do. Case in point: he wants to replace Obamacare. OK, with what? He’s not telling us with what or will he eliminate Obamacare altogether and tell 20 million Americans you’re on your own? Does he really think that the insurance companies are going to lower their rates? Insurance companies have never done that and never will. So Mr. Trump you need to be a bit more forthright if you wish to be POTUS.
Donald Trump is now changing his game plan as he’s maneuvering the campaign to be not about him but to focus on Hillary, time will tell if this works…

Crude Oil Is Trading Higher

Crude oil is trading higher and the markets are higher. 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.

Nick Mastrandrea is the author of Market Tea Leaves. Market Tea Leaves is a daily newsletter that is dedicated to your trading success. We teach and discuss 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.