NFP Friday

Good Morning Traders,
As of this writing 4 AM EST, here’s what we see:
US Dollar: Jun. USD is Up at 98.660.
Energies: May Crude is Down at 45.07.
Financials: The June 30 year bond is Up 2 ticks and trading at 151.25.
Indices: The June S&P 500 emini ES contract is 5 ticks Lower and trading at 2384.25.
Gold: The April gold contract is trading Up at 1233.50. Gold is 49 ticks Higher than its close.
Initial Conclusion

This is not a correlated market. The dollar is Up+ and crude is Down- which is 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 indices are Down- and Crude is trading Down- which is 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 mainly lower with the exception of the Nikkei exchange. As of this writing all of Europe is trading to the downside.
Possible Challenges To Traders Today

– Average Hourly Earnings is out at 8:30 AM. This is major.

– Non-Farm Employment Change is out at 8:30 AM. This is major.
– Unemployment Rate is out at 8:30 AM. This is major.
– FOMC Member Fischer Speaks at 11:30 AM. This is major.
– Fed Chair Yellen Speaks at 1:30 PM EST. This is major.
– FOMC Member Evans Speaks at 1:30 PM EST. This is major.
– Consumer Credit m/m is out at 3 PM EST. 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 10:30 AM after most of the economic news was reported. 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 10:30 AM 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 10:30 AM 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 – June, 2017 – 5/4/17
YM- June, 2017 – 5/4/17
Bias

Yesterday we gave the markets an upside bias as the Bonds and Gold were both trading lower and this usually represents an upside day for the markets. However the Dow dropped 6 points and the other indices only saw fractional gains. Given that today is Jobs Friday we will maintain a neutral bias.
Could this change? Of Course. Remember anything can happen in a volatile market.
Commentary

So the markets were poised to go higher yesterday but really didn’t. So what happened? Well there was this measure called the Health Bill in Congress that passed by about 4 votes and the markets were all over the map trying to determine direction but couldn’t. The Dow dropped 6 points, the S&P gained 1 and the Nasdaq gained 3. It seems that no one particularly liked this bill either as the CBO has yest to determine what the actual cost will be as well as how many people will lose coverage. This is what happens when you try to ram something thru as opposed to thinking it thru fully. Today we have NFP for April and we will maintain a neutral bias as historically speaking the markets have never behaved with any sense of normalcy on this day.

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 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 June Crude dropped to a low of $45.29 a barrel. It would appear at the present time that crude has support at $44.50 a barrel and resistance at $47.71. 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 June. 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 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

So the House of Representatives just passed the new Healthcare Bill which in essence is the old Healthcare bill (that was shot down in March) but with a few tweaks in them to make it more palatable to moderate Republicans. Supposedly an individual can’t be denied insurance for a pre-existing condition however the states themselves can allow an insurer to deny coverage to a person in that particular state for a pre-existing condition. All subsidies would be eliminated and replaced with tax credits which of course doesn’t help when it comes to paying the monthly premium. The Federal government will pledge 8 Billion dollars over a 5 year period to help those with pre-existing conditions which of course is a drop in the bucket. The CBO has yet to determine how many people will lose coverage, the increased premium people will have to pay and just how affordable is it?

This is what happens when you try to slam something thru without thinking about the ramifications. The GOP browbeat every holdout on this bill and now it will go to the Senate in which some pundits are now saying “it will never pass”. Oh really? You mean just like this bill wasn’t supposed to pass but just did?

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.