Good Morning Traders,
As of this writing 4:05 AM EST, heres what we see:
US Dollar: Dec. USD is Down at 100.895.
Energies: January Crude is Down at 45.52.
Financials: The Dec 30 year bond is Up 23 ticks and trading at 153.17.
Indices: The December S&P 500 emini ES contract is 39 ticks Lower and trading at 2201.50.
Gold: The December gold contract is trading Up at 1194.40. Gold is 160 ticks Higher than its close.
This is not a correlated market. The dollar is Down- and crude is Down- which is not 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 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.
Asia traded mainly Higher with the exception of the Japanese Nikkei exchange. As of this writing all of Europe is trading Lower at this hour.
Possible Challenges To Traders Today
No major economic news to speak of.
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 10 AM EST with no economic news in sight. 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 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 11/25/16
YM- December, 2016 11/25/16
Last Wednesday just prior to the Thanksgiving Holiday our bias was neutral as the USD, the Bonds and Gold were all trading higher and this ordinarily would have signaled a downside bias except the futures were trading higher as well. On Wednesday the Dow advanced 59 points and this past Friday it advanced 69 points. 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.
We just celebrated the Thanksgiving Holiday in the United States and just prior to the holiday the Dow advanced 59 points and even during the the abbreviated holiday session (the markets closed at 1 PM EST on Friday) the Dow again advanced 69 points. The question is can the markets maintain and keep this tempo going in December and until Christmas? Usually at around this time of year we discuss the prospect and possibility of a Santa Claus rally and some years we get it and other years we dont. We are particularly poised this year for such a rally as since Election Day the markets have been on a rampage to make up and advance to higher ground. This year (given that it was an Election Year) the markets have had difficulty getting to and maintaining a higher high. At this point the markets want to advance as we now know who the next President will be. The one fly in the ointment? We have an FOMC Meeting in December and this could change everything. Do we think the Fed will hike? No, we dont if only because they dont want to do anything to upset consumer spending for the holidays. 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. On Friday January Crude dropped to a low of $45.89 a barrel. It would appear at the present time that crude has support at $45.01 a barrel and resistance at $47.36. 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.
So now that Mr. Trump has the job and will become the 45th President of the United States, what will he do and how will that affect us? We believe hes starting to realize how intense this job is. If you saw him after he met with Obama it was a look of realization, as if to say what have I done or what do I do now? Some of his choices for his Cabinet arent resting too well with many folks. Rudy Guiliani? Thats an individual who definitely forgot where he came from and appointing his son-in-law in a cabinet post? Very bad idea as we have laws that forbid such. Limiting the number of terms anyone in government can serve? Another bad idea that Mitch McConnell will want to shoot down. Bottom line, he starting to back off many of his campaign promises. A Special Prosecutor for Hillary? I would venture to say that a deal was already cut whereby Hillary concedes quickly (as she did) and Trump backs off the investigation. On Friday the 18th he already cut a deal to stop the Trump University lawsuit by shelling out 25 million dollars to end it. Just about the one smart move the Donald made thus far is to attempt to reconcile with Mitt Romney and make him Secretary of State. Mr. Romney certainly has the political tact and diplomacy needed for such a job wheres as Giuliani would be a disaster. It still is not yet known if Mitt will accept the post but Donald should tell his campaign manager that the election is now over and kindly keep your thoughts regarding Mitt Romney to yourself .
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.