Good Morning Traders,
As of this writing 4:50 AM EST, heres what we see:
US Dollar: Dec. USD is Up at 98.045.
Energies: November Crude is Down at 49.93.
Financials: The Dec 30 year bond is Up 26 ticks and trading at 164.29.
Indices: The December S&P 500 emini ES contract is 57 ticks lower and trading at 2117.25.
Gold: The December gold contract is trading Up at 1258.30. Gold is 47 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 also trading lower.
Possible Challenges To Traders Today
Unemployment Claims are out at 8:30 AM EST. This is major.
Import Prices m/m are out at 8:30 AM EST. This is not major.
Natural Gas Storage is out at 10:30 AM EST. This is major.
Crude Oil Inventories are out at 11 AM EST. This is major.
30-y Bond Auction starts at 1 PM 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 10 AM EST at around the time that the JOLTS Job numbers came out. The ZB hit a high at around that time and the YM hit a low. If you look at the charts below ZB gave a signal at around 10 AM EST and the YM was moving higher at the same time. Look at the charts below and youll see a pattern for both assets. ZB hit a high at around 10 AM EST and the YM hit a low. 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 shorting opportunity on the 30 year bond, as a trader you could have netted about 10 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 10/12/16
YM- December, 2016 10/12/16
Yesterday we gave the markets a neutral as both the USD and the Bonds were trading lower and in theory the indices should have been trading higher but werent. For those of you who are new to us a neutral bias means the markets could go in any direction. The Dow and S&P both closed fractionally higher but the Nasdaq dropped 8 points. All in all a mixed day which is what a neutral bias should reflect. 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 afternoon the FOMC Meeting Minutes came out and wouldnt you know it, everything is great in the US economy. At least according to the Fed it is. They claim credit for keeping rates steady even though there was a reasonable argument for a rate increase. One member claims that the interest rate hikes will be gentle. Oh really? Is that why banks use a rate increase to declare warfare on their customers? And what about consumer spending? If the Fed raises in December what that do to holiday spending? I wonder sometimes if the Fed really thinks these things thru as we are of the opinion that a rate increase is the quickest way to deep six the economy. A rate increase sends a signal to batten down the hatches, so to speak and it still doesnt stop banks from making a profit as no bank charges the FFR (Fed Funds Rate). Already The JOLTS Job numbers came in less than expected (5.44M versus 5.79 expected). What do they think will happen with rate increases and Jobs Numbers lower? Consumer Spending will suffer and 70% of the US economy is consumer spending
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 $49.89 a barrel. It would appear at the present time that crude has support at $49.73 a barrel and resistance at $50.88. 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 11 AM EST when the inventory numbers are released and the markets gives us better direction.
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 didnt work. Throughout the debate Hillary kept her composure and at least expressed concern for the audiences 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? Hes not saying. He vaguely mentioned getting rid of state run insurance commissioners (Youre 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 theyll stick to that state.
On another issue he mentioned that hell 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 countrys ever seen. Ive said long ago that this individuals credo is simple: win at any cost. Hes 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 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.