Good Morning Traders,
As of this writing 4:10 AM EST, heres what we see:
US Dollar: Dec. USD is Up at 95.675.
Energies: November Crude is Down at 47.10.
Financials: The Dec 30 year bond is Up 10 ticks and trading at 169.30.
Indices: The December S&P 500 emini ES contract is 41 ticks lower and trading at 2138.25.
Gold: The October gold contract is trading Up at 1323.10. Gold is 14 ticks higher than its close.
This is not a correlated market. The dollar is Up+ and crude is Down- which is normal and the 30 year bond is trading Up. 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 Down and Crude is trading Down which is not correlated. Gold is trading Up 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 dont 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 lower with the exception of the Shanghai exchange which traded higher. As of this writing all of Europe is trading lower.
Possible Challenges To Traders Today
Core PCE Price Index m/m is out at 8:30 AM EST. This is major.
Personal Spending m/m is out at 8:30 AM EST. This is major.
Personal Income m/m is out at 8:30 AM EST. This is major.
Chicago PMI is out at 9:45 AM EST. This is not major.
Revised UoM Consumer Sentiment is out at 10 AM. This is not major.
Revised UoM Inflation Expectations are out at 10 AM. This is not major.
Weve elected to switch gears a bit and show correlation between the 30 year bond (ZB) and The YM futures contract. The YM contract is the DJIA and the purpose is to show reverse correlation between the two instruments. Remember its liken to a seesaw, when up goes up the other should go down and vice versa.
Yesterday the ZB made its move at around 10:30 AM EST at around the time Nat Gas Storage was reported. The ZB hit a low at around that time and the YM hit a high. If you look at the charts below ZB gave a signal at around 10:30 AM EST and the YM was moving lower at the same time. Look at the charts below and youll see a pattern for both assets. ZB hit a low at around 10:30 AM EST and the YM hit a high. These charts represent the latest version of Trend Following Trades and Ive changed the timeframe to a 30 minute chart to display better. This represented a long opportunity on the 30 year bond, as a trader you could have netted about 50 plus ticks per contract on this trade. Each tick is worth $31.25. 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.
ZB December, 2016 9/29/16
YM- December, 2016 9/29/16
Yesterday we gave the markets a neutral bias as we werent convinced that the indices had any conviction. The Dow dropped 196 points and the other indices lost ground as well. Today we arent dealing with a correlated market and our bias is to the downside.
Could this change? Of Course. Remember anything can happen in a volatile market.
So what happened to all those nice gains we saw earlier in the week? Was it economic news that brought it down? Donald Trump? Janet Yellen? No. It was brought about by the news that Deutsche Bank may be failing and the German government has no plan to help or bail them out. Just what the world needs, another crisis and it seems as though its one crisis after another. This one however will have a global impact as Deutsche Bank is considered a power house in the banking industry. This is not just the Cadillac of the banking but the Rolls Royce. This is liken to Lehman Brothers from 2008 and will have a worldwide effect on the markets. We advised readers of this newsletter to stay out of the markets yesterday via our neutral bias; which means the markets could go in any direction.
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:
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 Im proud of the fact that they did as Im 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, Ive 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:
As readers are probably aware I dont trade equities. While were on this discussion, lets define what is meant by a good earnings report. A company must exceed their prior quarters earnings per share and must provide excellent forward guidance. Any falloff between earning per share or forward guidance will not bode well for the companys shares. This is one of the reasons I dont trade equities but prefer futures. There is no earnings reports with futures and we dont have to be concerned about lawsuits, scandals, malfeasance, etc.
Anytime the market isnt correlated its giving you a clue that something isnt right and you should proceed with caution. Today our bias is to the downside. Could this change? Of course. In a volatile market anything can happen. Well have to monitor and see.
As I write this the crude markets are lower and the futures are trading lower. 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 November Crude dropped to a low of $46.98 a barrel. It would appear at the present time that crude has support at $46.09 a barrel and resistance at $48.30. This could change. Well 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 havent 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 its 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.
Well the debate came and went and depending upon who you listen to either Hillary or Donald won. They have different means of reaching the same objective. The Democrats on one hand think the economy is doing fine and that the only thing that should be done is to tax the wealthy. Donald on the other hand believes that unless you make the corporations pay dearly for their sins, then nothing will change. I have to admit he was right in this regard. His idea? Tax the products that were formally made in the US (now being made in Mexico) as a tariff and make it so high that no company would consider moving to Mexico to begin with. This would require a renegotiation of all trade deals as what we have now isnt working.
It appears as though the Smart Money thinks Hillary won this debate as they want her to be President. Why? They like the status quo and dont want any change to that status quo. Our take is simply this: neither one of these candidates will be good for the American people. Hillary thinks taxing the wealthy will solve all problems but Hillary has a serious credibility issue as few trust her. Donald on the other hand has no diplomacy or tact and could lead this nation into a world war with that mouth of his. He even interrupted Hillary during the debate by stating its business when referring to the financial meltdown of 2008. Do we really need a President that will refer to a downturn as its business? So once again the American people are faced with lousy choices .
Crude Oil Is Trading Lower
Crude oil is trading lower and the markets are lower. 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 todays market is crucial. We as traders are faced with numerous challenges that we didnt have a few short years ago. High Frequency Trading is one of them. Im 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, youll also receive our daily Market Bias video that is only available to subscribers.