Good Morning Traders,
As of this writing 4 AM EST, heres what we see:
US Dollar: Dec. USD is Up at 97.060.
Energies: November Crude is Up at 50.66.
Financials: The Dec 30 year bond is Down 3 ticks and trading at 164.31.
Indices: The December S&P 500 emini ES contract is 24 ticks lower and trading at 2150.50.
Gold: The December gold contract is trading Up at 1257.20. Gold is 42 ticks higher than its close.
This is not a correlated market. The dollar is Up+ and crude is Up+ which is not 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 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 Europe is trading mainly lower with the exception of the London exchange which is trading higher.
Possible Challenges To Traders Today
Average Hourly Earnings m/m is out at 8:30 AM. This is major.
Non-Farm Employment Change is out at 8:30 AM. This is major.
Unemployment Rate is out at 8:30 AM EST. This is major.
Final Wholesale Inventories is out at 10 AM. This is not major.
FOMC Member Fischer Speaks at 10:30 AM. This is major.
FOMC Member Mester Speaks at 12:45 PM. This is major.
FOMC Member George Speaks at 3 PM. This is major.
Consumer Credit is at at 3 PM. This is major.
FOMC Member Brainard Speaks at 4 PM. 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 after all the major economic news 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 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 10/6/16
YM- December, 2016 10/6/16
Yesterday we gave the markets a neutral bias as the USD and the Bonds were both trading up and this should represent a downside bias however the indices were trading higher yesterday morning which means the markets had no sense of direction hence the neutral bias. The Dow dropped 13 points, the S&P gained 1 and the Nasdaq lost ground; all in all a mixed day. Today given that it is Jobs Friday, our bias is neutral.
Could this change? Of Course. Remember anything can happen in a volatile market.
Yesterday we maintained our neutral bias as both the USD and the Bonds were trading higher and ordinarily this would mean a downside bias however the indices themselves were trading higher yesterday morning and this means no sense of direction and hence the neutral bias. Today our bias is neutral because it is Jobs Friday aka Non-Farm Payrolls and we always maintain a neutral bias on that day. Why? The markets have never shown any sense of normalcy on this day especially given the fact that we have no fewer than 4 talking heads from the Fed speaking and they each have their own ideas as to what should be done relative to interest rates. I wish the Fed would borrow a page from Corporate America and have one spokesperson speak and the others maintain silence. In that way youre getting one opinion from one person with a unified front. But I guess thats too easy for the Fed to do
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 neutral. 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 $49.90 a barrel. It would appear at the present time that crude has support at $49.66 a barrel and resistance at $51.12. 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.
Tuesday night we had the Vice President debate and it seemed from our perspective that Governor Mike Pence won that debate on political polish alone. His opponent Tim Kaine was interruptive and basically took on the role that Donald Trump last week against Hillary. Mike Pence on the other hand was cool, calm and not argumentative. If you ask us Mike Pence won that debate but a CNN poll of undecided voters picked Tim Kaine as the winner. This upcoming Sunday evening Donald Trump and Hillary will hold their second of three debates, this time the setting will be a town hall meeting. If you ask me Donald needs to borrow a play from Mike Pence and act more dignified.
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.