Good Morning Traders,
As of this writing 4 AM EST, heres what we see:
US Dollar: Mar. USD is Down at 100.790.
Energies: March Crude is Up at 53.17.
Financials: The Mar 30 year bond is Up 11 ticks and trading at 150.09.
Indices: The March S&P 500 emini ES contract is 9 ticks Lower and trading at 2348.25.
Gold: The April gold contract is trading Up at 1237.20. Gold is 42 ticks Higher than its close.
This is not a correlated market. The dollar is Down- and crude is Up+ which is normal but the 30 year bond is trading Higher. 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 Up which is 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 Nikkei exchange which traded lower. As of this writing Europe is trading mainly lower with the exception of the Milan exchange which is trading higher at this hour.
Possible Challenges To Traders Today
Building Permits at 8:30 AM EST. This is major.
Philly Fed Manufacturing Index at 8:30 AM EST. This is major.
Unemployment Claims are out at 8:30 AM EST. This is major.
Housing Starts is out at 8:30 AM EST. This is major.
Nat Gas Storage is out at 10:30 AM 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 12 PM 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 12 PM 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 12 PM EST and the YM hit a low. 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 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 March, 2017 2/15/17
YM- March, 2017 2/15/17
Yesterday we gave the markets a neutral bias as both Gold and the USD were trading higher and this usually results in the indices trading lower however that didnt happen yesterday morning, hence the neutral bias. The Dow traded 107 points higher and the other indices traded higher as well. Today we arent dealing with a correlated market and our bias is to the downside.
Could this change? Of Course. Remember anything can happen in a volatile market.
Yesterday Janet Yellen completed her testimony to a Congressional Committee but that wasnt what moved the markets yesterday. The market is foaming with an anticipated Trump Tax Plan that will call for massive tax cuts and the Street ate it up. They were apparently blind to anything else. Yesterday we had an unprecedented 14 economic reports but again that wasnt the driver. This entire rally has been fueled with the expectation on a proposed tax plan that still hasnt been shared. I just hope Trump can deliver on this plan.
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. 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: http://www.futuresmag.com/2015/01/15…orning-trading
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 to the downside. 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 Higher and the futures are trading Lower. This is normal. Crude and the markets are now reverse correlated such that when the markets are rising, crude drops and vice-versa. Yesterday March Crude dropped to a low of $52.88 a barrel. It would appear at the present time that crude has support at $52.50 a barrel and resistance at $53.65. This could change. Well have to monitor and see. Remember that crude is the only commodity that is reflected immediately at the gas pump. Please note that the front month for crude is now March. Last December and 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 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. As an update to this the non-OPEC countries have come to an agreement to unilaterally cut production across the board and this has served to temporarily raise crude prices. Well have to see if and how long this lasts
If trading crude today consider doing so after 10 AM EST when the markets gives us better direction.
The new US President has much to learn about politics and getting things done. He came into office with the notion of draining the swamp but what he hasnt figured out yet is how the swamp works. In other words if you want to fix something you must first understand how it works. He doesnt want to understand or learn how it works, he just wants to replace it but has yet to say how or what that replacement will be or what it looks like. Within less than 30 days, this President has managed to perturb:China, Russia, Iran, Israel, Iran and Australia. His NSA Advisor was found to be buddy-buddy with Russia and had to resign and Trump is blaming the media! His Counselor Kelly Ann Conway cant even tell the truth in an interview and constantly pivots, deflects and avoids answering any question. Trump himself refuses to answer any question he doesnt feel like answering. What I find to be concerning about this is a refusal to accept and/or face reality when its staring right at you but rather explain it away with alternate facts
TradersLog has just published an article entitled So You Think You Can Trust Your Elected Officials? That article can be viewed at: http://www.traderslog.com/trust-elected-officials
Crude Oil Is Trading Higher
Crude oil is trading Higher and the markets are Lower. 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. Remember that without knowledge of order flow we as traders are risking our hard earned capital and the Smart Money will have no issue taking it from us. Regardless of whatever platform you use for trading purposes you need to make sure its monitoring order flow. Sceeto does an excellent job at this. To fully capitalize on this newsletter it is important that the reader understand how the various market correlate. More on this in subsequent editions.
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.