Good Morning Traders,
As of this writing 4:35 AM EST, here’s what we see:
US Dollar: Mar. USD is Down at 99.955.
Energies: March Crude is Up at 53.11.
Financials: The Mar 30 year bond is Down 9 ticks and trading at 149.06.
Indices: The March S&P 500 emini ES contract is 11 ticks Higher and trading at 2296.75.
Gold: The February gold contract is trading Down at 1197.00. Gold is 8 ticks Lower than its close.
This is a nearly correlated market. The dollar is Down- and crude is Up+ which is normal and the 30 year bond is trading Lower. 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 Up+ and Crude is trading Up+ 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 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.
All of Asia traded higher. As of this writing Europe is trading higher.
Possible Challenges To Traders Today
– Unemployment Claims is out at 8:30 AM EST. This is major.
– Goods Trade Balance is out at 8:30 AM EST. This is major.
– Prelim Wholesale Inventories is out at 8:30 AM EST. This is not major.
– Flash Services PMI is out at 9:45 AM EST. This is major.
– New Home Sales is out at 10 AM EST. This is major.
– CB Leading Index m/m is out at 10 AM EST. This is major.
– Natural Gas Storage is out at 10:30 AM EST. This is major.
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 8 AM EST with no eco 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 8 AM EST and the YM was moving higher at the same time. Look at the charts below and you’ll see a pattern for both assets. ZB hit a high at around 8 AM EST and the YM hit a low. 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 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 – 1/25/17
YM- March, 2017 – 1/25/17
Yesterday we gave the markets an upside bias as the Bonds and Gold were trading lower and this bodes well for an upside day. The markets didn’t disappoint as the Dow gained 156 points and the other indices gained ground as well. Today we’re dealing with a nearly correlated market, hence our bias is to the upside.
Could this change? Of Course. Remember anything can happen in a volatile market.
So the markets went higher again yesterday as the Dow finally penetrated the 20,000 level and closed at 20,068.51. Prior to this it broached the 20,000 level but did not surpass it. Yesterday it did and this was despite Trump reiterating his stance that a wall with Mexico will be built and they’re going to pay for it (one way or another). Today we have 7 economic reports, most of which are major, so time will tell how the markets react to this. Will traders take the money and run or will they hang in awhile longer?
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 upside. 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 Higher and the futures are trading Higher. 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 March Crude dropped to a low of $52.56 a barrel. It would appear at the present time that crude has support at $52.09 a barrel and resistance at $53.80. 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 March. Last month and after two years OPEC finally decided to cut production but the price 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.
On Tuesday I had the opportunity to view Congressional Hearings on the choice of Rep. Tom Price for HHS Secretary. Now Mr Price is a Doctor and at first glance you might think “well whats to debate about”? But Mr. Price did not answer key questions that were thrown at him during thee hearings, namely what will replace Obamacare as it’s very clear that the GOP wishes to dismantle it. Every time he was asked a key question he pivoted, tried to change the subject or said that “I look forward to working with you” without providing any clear substance. When a politician says “work with you” what they’re saying is “submit an idea and if I like it we’ll work together, if not then we won’t”. Between Tom Price and Mick Mulvaney who never paid tax on his babysitter’s wages; I think the President should bring back the Marx Brothers to run his cabinet. At least they were entertaining…
On another subject the President is still claiming voter fraud on his election. He stated that between 3-5 million voters committed voter fraud and that’s why he didn’t win the popular vote. Mr President, you won the election, now let’s get on with the work running the country….
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 Higher. 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.
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