Good Morning Traders,
As of this writing 4 AM EST, heres what we see:
US Dollar: Dec. USD is Down at 101.480.
Energies: January Crude is Down at 49.32.
Financials: The Dec 30 year bond is Down 32 ticks and trading at 151.21.
Indices: The December S&P 500 emini ES contract is 3 ticks Lower and trading at 2207.50.
Gold: The December gold contract is trading Down at 1169.80. Gold is 10 ticks Lower 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 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 Down which is not correlated. Gold is trading Down which is not 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 Higher and conversely all of Europe (as of this writing) is trading Lower.
Possible Challenges To Traders Today
Challenger Job Cuts y/y is out at 7:30 AM EST. This is major.
Unemployment Claims is out at 8:30 AM EST. This is major.
Final Manufacturing PMI is out at 9:45 AM EST. This is not major.
ISM Manufacturing PMI is out at 10 AM EST. This is major.
Construction Spending m/m is out at 10 AM EST. This is major.
ISM Manufacturing Prices is out at 10 AM EST. This is major.
Nat Gas Storage is out at 10:30 AM EST. This is major.
Total Vehicle Sales All Day. 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 11:30 AM EST with no economic news in sight. 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 11:30 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 11:30 AM EST and the YM hit a high. These charts represent the newest 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 11/30/16
YM- December, 2016 11/30/16
Yesterday we gave the markets an upside bias as the Bonds and Gold were both trading lower and this usually represents an upside bias for the indices. The Dow traded 2 points higher and remained in positive territory but the other indices dropped. 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.
So finally after two years OPEC decides to cut crude oil production. Initially the markets reacted positively to this as it means that the price of crude should rise. However weve been telling our followers for the last two years that crude and the markets are reverse correlated meaning that when one goes up, the other should go down. Prior to two years ago they worked in tandem with one another. So given that they are now reverse correlated, what happened? The price of crude went up and guess what? The markets dropped. In fact the Dow was very much in danger of closing in negative territory and almost did but was saved by the closing bell. The Dow only advanced 2 points but the Nasdaq dropped by 56 and the S&P lost 5.
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 January Crude dropped to a low of $47.86 a barrel. It would appear at the present time that crude has support at $48.50 a barrel and resistance at $50.00. This could change. Well have to monitor and see. Remember that crude is the only commodity that is reflected immediately at the gas pump. Yesterday after two years OPEC finally decided to cut production but the price crude is still tame (as of this writing). 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.
The move by OPEC to cut production in an attempt to pump up prices is liken to too little, too late as the world doesnt need their oil as much much as they used to. Power equipment that used to need oil (Grass Trimmers, Lawn Mowers, Autos) now run on battery power and Canada and the United States are producing more of their own crude.
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.