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AA Not A-OK with Markets

Wednesday, October 12, 2016 2:18
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AA not A-OK with Markets

Good Morning Traders,
As of this writing 4 AM EST, here’s what we see:
US Dollar: Dec. USD is Down at 97.560.
Energies: November Crude is Up at 51.01.
Financials: The Dec 30 year bond is Down 9 ticks and trading at 164.02.
Indices: The December S&P 500 emini ES contract is 14 ticks lower and trading at 2131.00.
Gold: The December gold contract is trading Down at 1255.80. Gold is 1 tick lower than its close.
Initial Conclusion

This is not a correlated market. The dollar is Down- and crude is Up+ which is normal and the 30 year bond is trading Down. 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 Up which is correlated. Gold is trading Down 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 lower with the exception of the Indian Sensex exchange which traded higher. As of this writing Europe is also trading lower with the exception of the Spanish IBEX and Milan exchange which are trading higher at this hour.

Possible Challenges To Traders Today

– FOMC Member Dudley Speaks at 8 AM. This is major.
– FOMC Member George Speaks at 9:40 AM EST. This is major.

– JOLTS Job Openings are out at 10 AM EST. This is major.
– 10-y Bond Auction starts at 1 PM EST.
– FOMC Meeting Minutes is out at 2 PM EST. This is major.
– Federal Budget Balance. This is major.


We’ve 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 it’s liken to a seesaw, when up goes up the other should go down and vice versa.
Yesterday the ZB made it’s move at around 10:30 AM EST with no economic news 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 you’ll 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 I’ve 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 30 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 – 10/11/16
YM- December, 2016 – 10/11/16


Yesterday we gave the markets a downside bias as the USD and Gold were both trading higher yesterday morning and tis is indicative of a downside move. The Dow dropped 200 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.

Yesterday Alcoa kicked off earnings season and for the first time decided to report at 8:30 AM versus the 4 PM time slot they usually report. We’ve been saying for awhile that this quarter will not be a stellar one for the markets as consumer spending is down, GDP is not where it should be at this point in the cycle and the Fed wants to raise rates and has basically told us that they will come December. Last Friday Non Farm Payrolls did not meet expectation for a reason. When earnings are down and consumer spending is down, hiring will stall and slowdown altogether. Alcoa shares dropped 11% in the mayhem and today we have Fed Members who will probably tell how great things are and yes we need to hike. The rest of the global economy isn’t hiking and in fact are embracing negative rates yet this Federal Reserve sees fit to increase. I hope that between now and December cooler minds will prevail but as always only time will tell….
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:…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:…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 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 $50.39 a barrel. It would appear at the present time that crude has support at $49.99 a barrel and resistance at $51.79. 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

Sunday night we experienced the second of three Presidential debates and as usual it turned into a mud slinging contest between Donald Trump and Hillary Clinton. Prior to the debate Trump brought out 4 women who claimed to have had an affair with Bill Clinton. This was an obvious attempt to throw Hillary off her game plan and make her look less presidential. It didn’t work. Throughout the debate Hillary kept her composure and at least expressed concern for the audience’s issues. Donald Trump on the other hand offered no alternatives or real solid plans on anything. He claims he wants to repeal Obamacare. OK, and replace it with what? He’s not saying. He vaguely mentioned getting rid of state run insurance commissioners (You’re Fired) in an attempt to open the doors for other insurance companies to compete. This will do nothing to lower premiums as if an insurer wants to do business in another state they must hire personnel, establish an office presence and make a commitment that no matter what they’ll stick to that state.

On another issue he mentioned that he’ll have Hillary jailed if elected. This is what dictators do when they attain power and quite frankly if elected Donald Trump will be the closest thing to a dictator that this country’s ever seen. I’ve said long ago that this individual’s credo is simple: win at any cost. He’s just denigrated the Presidential debating and election process in this country. I trust that the American people will see thru this charade.

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 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 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.


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