Election Day...finally!!!

Good Morning Traders,
As of this writing 4 AM EST, here’s what we see:
US Dollar: Dec. USD is Down at 97.600.
Energies: December Crude is Up at 45.05.
Financials: The Dec 30 year bond is Up 17 ticks and trading at 162.30.
Indices: The December S&P 500 emini ES contract is 4 ticks Higher and trading at 2130.00.
Gold: The December gold contract is trading Up at 1285.40. Gold is 60 ticks Higher than its close.
Initial Conclusion

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 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 to the upside with the exception of the Nikkei exchange which traded lower. As of this writing Europe is trading mixed with about half the exchanges higher and the other half lower.

Possible Challenges To Traders Today

– NFIB Small Business Index is out at 6 AM. This is not major.
– JOLTS Job Openings is out at 10AM EST. This is major.
– Presidential Election – All Day This is major.
– Congressional Elections – All Day. This is major.

Treasuries

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 AM EST with no economic news to speak of. 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 you’ll 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 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 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 – 11/7/16
YM- December, 2016 – 11/7/16

Bias

Yesterday we gave the markets an upside bias as the Bonds and Gold were both trading lower yesterday morning and this is indicative of an upside day. The Dow advanced 371 points and the other indices gained 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.
Commentary

Finally Election Day has come to the United States and hopefully tomorrow morning we’ll know who the next President will be. I must say that in my lifetime this has been the most controversial Presidential election I’ve witnessed. Mind you I’m old enough to remember the Cuban Missile Crisis, the next nearest one would have to be Bush-Gore in 2000. We may very well see a reprise of that as Donald Trump has vowed not to accept the election results, unless of course he wins. This election will also determine the kind of market we can expect going forward. Wall Street wants Hilary to win and if she does we can expect a sane, stable market going forward. Look at what just happened yesterday. If Trump wins we can expect uncertainty and the markets despise uncertainty even though the markets themselves are the most uncertain entities on the planet. All this being said, only time will tell what will happen next….
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:
http://www.traderslog.com/market-cor…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:
http://www.futuresmag.com/2015/01/15…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 higher. 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 December Crude dropped to a low of $44.11 a barrel. It would appear at the present time that crude has support at $44.16 a barrel and resistance at $45.43. 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

As Election Day rapidly approaches, there is no shortage of news fodder for either candidate. Everyone is projecting a Clinton victory and yet on Friday (October 28th) the FBI decided to reopen the Clinton email fiasco. Why? Hillary’s email wound up on Anthony Wiener’s computer. Why? Because Anthony’s then wife was Clinton’s personal assistant. Of course on the GOP side they’re talking this up big time as well as assuming that Michael Moore’s latest film (Trumpland) was an endorsement for Donald which it is not. The challenge here will be if Clinton wins will Trump concede or demand a recount? He can ask for a 50 state recount but he won’t get it as the states control the voting process, not the federal government. In all likelihood he’ll pick out a state that is very close to call and can put him over the 270 electoral votes needed to win. Of course this is all subjective and as always, only time will tell…

As an update to this issue the FBI has come out and stated that they will hold to their original assessment from July that basically says there is no evidence of wrongdoing on the part of Hilary Clinton. For all purposes, the case is closed yet the GOP is hamming it up big time. The sad part about this about 30 million citizens have already voted and no one yet knows which way they voted. If Hilary loses the Dems can blame the FBI…

Crude Oil Is Trading Higher

Crude oil is trading higher and the markets are higher. 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 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 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, you’ll also receive our daily Market Bias video that is only available to subscribers.