Dow 23,000

Good Morning Traders,
As of this writing 4:20 AM EST, here’s what we see:
US Dollar: Dec. USD is Down at 93.150.
Energies: Dec Crude is Down at 52.04.
Financials: The Dec 30 year bond is Up 12 ticks and trading at 153.14.
Indices: The Dec S&P 500 emini ES contract is 37 ticks Lower and trading at 2550.75.
Gold: The Dec gold contract is trading Up at 1286.20. Gold is 32 ticks Higher than its close.
Initial Conclusion

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 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 Lower 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 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.
At this hour all of Asia is trading Lower with the exception of the Nikkei and Singapore exchanges which are trading Higher. As of this writing all of Europe is trading Lower.
Possible Challenges To Traders Today

• Unemployment Claims are out at 8:30 AM EST, this is major.
• Philly Fed Mfg Index is out at 8:30 AM. This is major.
• CB Leading Index m/m out at 10 AM EST. This is major.
• Natural Gas Storage is out at 10:30 AM. This is major.
• Federal Budget Balance. 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. 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 you’ll see a pattern for both assets. ZB hit a Low at around 10 AM and the YM hit a High. These charts represent the newest version of Trend Following Trades and I’ve 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 a dozen 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. Please note that the front month for the ZB and the YM contract is now December, 2017.
Charts Courtesy of Trend Following Trades built on a NinjaTrader platform Click on an image to enlarge it.
ZB – Dec, 2017 – 10/18/17
YM- Dec, 2017 – 10/18/17
Bias

Yesterday our bias was to the Upside as both the Bonds and Gold were trading Lower and that usually is indicative of an Upside day. The markets didn’t disappoint as the Dow rose 160 points and the other indices gained as well although fractionally. Today we aren’t 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.
Commentary

Well it finally happened. The Dow not only breached 23,000 but closed above it for the first time. Many are crediting IBM’s earnings for the upswing but we think it’s more of the Smart Money wanting it to happen. Remember that the Smart Money has the horsepower (capital) to make it so and if they didn’t want it to happen then it wouldn’t have. Today we have about half a dozen economic reports, most of which are major, so time will tell how it all works out….

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 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 to the Downside. 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 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 November Crude dropped to a low of $51.69 a barrel. It would appear at the present time that crude has support at $51.38 a barrel and resistance at $52.66. 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. Please note that the front month for crude is now December. Last December and after two years OPEC finally decided to cut production but the price of crude is still tame (as of this writing). 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. The move by OPEC to cut production in an attempt to pump up prices is liken to “too little, too late” as the world doesn’t 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. We’ll 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.
Future Challenges

Well it appears as though the President isn’t quite done with Obamacare after all as he signed an Executive Order last Thursday virtually halting all payments of subsidies to insurers, in effect starving them out of the program. The President claims that he wants to establish nationwide coverage and thereby lowering costs, increasing competition and allowing US citizens to negotiate prices. This President has either forgotten a few things or perhaps never knew them to begin with.
Insurance in the United States has been a statewide affair since the 1870’s and is the reason why we have NAIC (National Association of Insurance Commissioners) and guess what? There are 50 of them and all of this was established by the Supreme Court. This means that each state has it’s own set of rules as what is lawful and allowable and what isn’t. It is the reason why some states will allow certain insurers to do business there and other won’t. So Mr. President as opposed to blaming the Democrats, you might want to start with the Supreme Court and your E.O. can’t change this because you need to develop one standardized set of rules that will work for all 50 states. Too bad you canned your HHS Secretary…..
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 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 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. 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 it’s 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, you’ll also receive our daily Market Bias video that is only available to subscribers.