Markets Dip on NAFTA News

Good Morning Traders,
As of this writing 4 AM EST, here’s what we see:
US Dollar: Mar. USD is Up at 92.255.
Energies: Feb ’18 Crude is Up at 63.58.
Financials: The Mar 30 year bond is Up 4 ticks and trading at 150.06.
Indices: The Mar S&P 500 emini ES contract is 10 ticks Higher and trading at 2753.00.
Gold: The Feb gold contract is trading Down at 1317.90. Gold is 14 ticks Lower than its close.
Initial Conclusion

This is not a correlated market. The dollar is Up+ and Crude is Up+ which is not normal and 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 S&P is Higher and Crude is trading Up+ which is not correlated. Gold is trading Down- which is correlated with the US dollar trading Up+. 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 Asia is trading Mixed with half the exchanges Higher and the other half Lower. As of this writing all of Europe is trading Mixed as well.
Possible Challenges To Traders Today

• PPI m/m is out at 8:30 AM. This is major.
• Core PPI m/m is out at 8:30 AM EST. This is major.
• Unemployment Claims is out at 8:30 AM EST. This is major.
• IBD/TIPP Economic Optimism. This is major.
• Natural Gas Storage is out at 10:30 AM EST. This is major.
• 30-y Bond Auction starts at 1 PM EST.
• Federal Budget Balance is out at 2 PM EST. This is major.
• FOMC Member Dudley Speaks at 3:30 PM. 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 12:30 PM 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 12:30 PM 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 12:30 PM and the YM hit a High. These charts represent the newest version of MultiCharts 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 20 plus ticks per contract on this trade. Each tick is worth $31.25.
Charts Courtesy of MultiCharts built on an AMP platform Click on an image to enlarge it.
ZB – Mar, 2018 – 1/10/18
YM- Mar, 2018 – 1/10/18
Bias

Yesterday we gave the markets a Neutral as the futures didn’t seem to have any sense of direction hence the neutral bias. The Dow dropped 17 points and the other indices lost ground as well. Today we aren’t dealing with a correlated market and will maintain a Neutral bias.
Could this change? Of Course. Remember anything can happen in a volatile market.
Commentary

Yesterday we gave the markets a neutral bias because we didn’t see any correlation amongst the various instruments we track. The markets started lower, went higher into positive territory and then dropped into closing. Of course hearing the news that President Trump maybe dropping out of NAFTA didn’t exactly help matters much. On the surface I would have to agree that NAFTA is a travesty that has not served the American people well. But many corporations depend on the free trade agreement for earnings, etc and not having won’t serve them well either. Could Trump have chosen another way? Of course but for him not to do what he did only means it wouldn’t be Trump doing it.

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 Neutral. 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 (they just turned negative) and the futures are trading Higher. This is normal. Crude and the markets are now reverse correlated such that when the markets are rising, crude drops and vice-versa. Yesterday February Crude dropped to a low of $63.23 a barrel. It would appear at the present time that crude has support at $62.00 a barrel and resistance at $64.00. 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 February. Last month OPEC met once again to cut production but the price of crude is starting to climb. Whereas prior to the production cuts the ceiling was in the 50 dollar range, it is now in the 60 plus dollar range. The question is if whether this is temporary or something more permanent. 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

On another note and this isn’t being brought up by the media; the government was scheduled to run out of funds on December 8th however Congress decided to impose a two week stop gap funding measure that will extend funds until December 22nd. At this time there are no talks between the GOP and Dems as to what the funding will look like going forward, so time will tell how this all works out…
As update to this it appears as though Congress has established funding for the government until mid-January, 2018 so this issue is deferred until that time.
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 Higher. 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 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.