Good Morning Traders,
As of this writing 4:10 AM EST, heres what we see:
US Dollar: Dec. USD is Down at 95.240.
Energies: November Crude is Up at 45.64.
Financials: The Dec 30 year bond is Up 30 ticks and trading at 167.17.
Indices: The December S&P 500 emini ES contract is 1 tick lower and trading at 2156.00.
Gold: The October gold contract is trading Up at 1332.30. Gold is 51 ticks higher than its close.
This is not a correlated market. The dollar is Down- and crude is Up+ which is normal but 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 Up and Crude is trading Up 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 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 higher. As of this writing all of Europe is trading higher.
Possible Challenges To Traders Today
Unemployment Claims are out at 8:30 AM EST. This is major.
HPI m/m is out at 9 AM EST. This is major.
Existing Home Sales is out at 10 AM EST. This is major.
CB Leading Index m/m is out at 10 AM EST. This is major.
Natural Gas Storage is out at 10:30 AM EST. This is 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 11:30 AM EST with no real news in sight until 2 PM EST. 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 11:30 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 11:30 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 20 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 9/21/16
YM- December, 2016 9/21/16
Yesterday we gave the markets a neutral bias as it was FOMC Day and we always maintain a neutral bias for both Jobs Friday and FOMC Day. The Dow gained 164 points and the other indices gained 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.
Yesterday we suggested that the Fed wouldnt raise and sure enough they didnt. In the ensuing press conference that followed the decision it was revealed that whereas the unemployment rate has dropped to 4.9%, inflation is still hovering at 1% versus the 2% the Fed wants to see and GDP is roughly 1.8% on an annualized basis and this is far less than anyone expected at this juncture. The Fed has suggested that one rate hike maybe forthcoming before this calendar year is out and we suspect that if one occurs, it will be in December after the Presidential election. The Fed cant really justify a rate hike as inflation is tame, the economy is not overheating and they need to be concerned that if they raise prematurely they could send this country into a recession. We hope that for the time being this will pacify the market and we can get into the business of trading
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 higher and the futures are trading lower. This is 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 $44.74 a barrel. It would appear at the present time that crude has support at $44.63 a barrel and resistance at $46.20. 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.
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 billionaires 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 hes going to do the things he says hell do. Case in point: he wants to replace Obamacare. OK, with what? Hes not telling us with what or will he eliminate Obamacare altogether and tell 20 million Americans youre 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.
Hillary Clinton recently came down with pneumonia and of course Donny and his Trumpets have already started the name calling campaign claiming health issues for Hillary.
Crude Oil Is Trading Higher
Crude oil is trading higher and the markets are lower. This is 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.