Good Morning Traders,
As of this writing 4 AM EST, heres what we see:
US Dollar: Dec. USD is Down at 97.650.
Energies: December Crude is Down at 46.37.
Financials: The Dec 30 year bond is Up 8 ticks and trading at 163.10.
Indices: The December S&P 500 emini ES contract is 18 ticks lower and trading at 2099.25.
Gold: The December gold contract is trading Up at 1295.50. Gold is 75 ticks higher than its close.
This is not a correlated market. The dollar is Down- and crude is Down- which is not 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 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 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 to the downside. As of this writing all of Europe is trading lower.
Possible Challenges To Traders Today
ADP Non-Farm Employment Change is out at 8:15 AM. This is major.
Crude Oil Inventories is out at 10:30 AM EST. This is major.
FOMC Statement is out at 2 PM EST. This is major.
Federal Funds Rate is out at 2 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 after 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 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 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 11/1/16
YM- December, 2016 11/1/16
Yesterday we gave the markets an upside bias but the markets digested the economic news reported and decided to go lower. The Dow dropped 105 points and the other indices lost ground as well. Given that today is FOMC Day our bias is neutral which means the markets could go in any direction today.
Could this change? Of Course. Remember anything can happen in a volatile market.
Yesterday morning the markets looked poised to go higher but we had positive economic news. Economic Optimism was up as well as Total Vehicle Sales. Now you might be asking isnt good economic news bullish for the markets? At first glance you would be right except these days when good economic news is reported the markets drop. Why? Because with good economic news comes the fear that the Fed will hike rates and the street doesnt want that. I personally dont want it either only because I think it will dampen consumer spending which accounts for over 70% of purchases in the United States and any dampening could throw a monkey wrench into an already tepid recovery. Do I think the Fed will raise today? No. Why? Because I dont think that theyll want to do anything prior to a major presidential election nor do I think theyll do so in December as most folks think. Why? Because I dont think theyll want to torpedo consumer spending during the Holiday Season. But as we say each day in this newsletter this could change
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 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 December Crude dropped to a low of $46.20 a barrel. It would appear at the present time that crude has support at $45.90 a barrel and resistance at $47.75. 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 10:30 AM EST when the inventory numbers are reported and the markets gives us better direction.
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 the FBI decided to reopen the Clinton email fiasco. Why? Hillarys email wound up on Anthony Wieners computer. Why? Because Anthonys then wife was Clintons personal assistant. Of course on the GOP side theyre talking this up big time as well as assuming that Michael Moores 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 wont get it as the states control the voting process, not the federal government. In all likelihood hell 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 but as always, only time will tell
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.