Good Morning Traders,
As of this writing 4 AM EST, heres what we see:
US Dollar: Dec. USD is Up at 96.690.
Energies: November Crude is Down at 49.58.
Financials: The Dec 30 year bond is Down 4 ticks and trading at 164.25.
Indices: The December S&P 500 emini ES contract is 17 ticks higher and trading at 2150.750.
Gold: The December gold contract is trading Up at 1264.60. Gold is 127 ticks higher than its close.
This is not a correlated market. The dollar is Up+ and crude is Down- which is normal but 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 Up and Crude is trading Down 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.
Asia traded mixed with half the exchanges trading higher and the other half lower. As of this writing all of Europe is trading lower.
Possible Challenges To Traders Today
Columbus Day Bank Holiday, no major economic news.
Lack of major economic news.
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.
On Friday the ZB made its move at around 9 AM EST after the Non Farm Payrolls 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 9 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 9 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 10/7/16
YM- December, 2016 10/7/16
On Friday we gave the markets a neutral bias as it was Jobs Friday and we always maintain a neutral bias on that day. The Dow dropped 28 points and the other indices lost ground as well. Today we arent dealing with a correlated market and our bias is neutral.
Could this change? Of Course. Remember anything can happen in a volatile market.
A strange thing happened on Friday. Net new jobs created in the US was 156,000. The problem? It didnt meet the expectation of 171,000 and it didnt stop the various Fed members from stating that a rate hike was virtually baked in for December despite the fact that earnings have been down and the markets are trading sideways with no real positive momentum. Oh by the way, the unemployment rate has crept up to 5.0% versus the 4.9% that its been for the last few months and the long term unemployment rate? Thats still 9.7% which is where its been for the past 4 months in a row. So if anyones thinking things are better, they need to think again. This week earnings season starts and I would venture to say that many firms will report earnings that did not meet expectations and many will announce job cuts to boost earnings. But as in all things, 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:
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 lower and the futures are trading higher. This is normal. Crude and the markets are now reverse correlated such that when the markets are rising, crude drops and vice-versa. On Friday November Crude dropped to a low of $49.40 a barrel. It would appear at the present time that crude has support at $48.95 a barrel and resistance at $50.71. 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.
Last 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 higher. 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.