FOMC Day

Good Morning Traders,
As of this writing 4 AM EST, here’s what we see:
US Dollar: Dec. USD is Down at 94.010.
Energies: Jan ’18 Crude is Up at 57.67.
Financials: The Mar 30 year bond is Up 8 ticks and trading at 152.29.
Indices: The Dec S&P 500 emini ES contract is 3 ticks Lower and trading at 2667.00.
Gold: The Feb gold contract is trading Up at 1243.70. Gold is 20 ticks Higher than its close.
Initial Conclusion

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 Lower 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 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 Europe is trading mainly Lower with the exception of the London and Milan exchanges which are trading fractionally Higher.
Possible Challenges To Traders Today

• CPI m/m is out at 8:30 AM EST. This is major.
• Core CPI is out at 8:30 AM EST. This is major.
• Crude Oil Inventories is out at 10:30 AM EST. This is major.
• President Trump Speaks. This is major.
• FOMC Economic Projections is out at 2 PM EST. This is major.
• FOMC Statement is out at 2 PM EST. This is major.
• Federal Funds Rate is out at 2 PM EST. This is major.
• FOMC Press Conference starts at 2:30 PM. This is major.
• FOMC Member Brainard Speaks at 6 PM EST.

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 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 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 10 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 15 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 – Dec, 2017 – 12/12/17
YM- Dec, 2017 – 12/12/17
Bias

Yesterday we gave the markets a Neutral bias as the Bonds and Gold were both pointed higher and in theory the indices should have been pointed lower and yet they were trading higher, hence the neutral bias. The Dow gained 119 points, the S&P gained 4 but the Nasdaq dropped 13. Given that today is FOMC Day we will maintain a neutral bias.
Could this change? Of Course. Remember anything can happen in a volatile market.
Commentary

Today is the last FOMC Meeting of 2017 and odds are that the Federal Reserve will hike the FFR (Federal Funds Rate) or commonly called the overnight rate which represents the interest rate percentage that the banks must pay the Fed to borrow funds. In essence this is the banks borrowing rate. Of course once the banks are involved they will charge what they please but they must be competitive. I think the Fed will raise for a number of reasons. Janet Yellen will no longer be the Fed Chair and the new Fed Chief was appointed by Trump. Trump is very much in favor of the Fed raising because it creates more passive income for high net worth persons like himself. The Fed can claim that the economy is doing so good that it’s a prudent idea to hike. However is it really a good idea to hike during the holiday shopping season? We don’t think so but as in all things, time will tell….

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 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 January Crude dropped to a low of $56.85 a barrel. It would appear at the present time that crude has support at $56.45 a barrel and resistance at $58.49. 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 January. This past week OPEC met once again 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 10:30 AM EST when the inventory numbers are released and the markets gives us better direction.

Future Challenges

The Tax Bill has passed the Senate muster but it is not the same bill as proposed by the House of Representatives. The House was much more harsh. Susan Collins of Maine made sure that two key components were in the Senate Bill: property taxes are still tax deductible (assuming that the property taxes on the home is $10,000 or less) and that Health insurance premiums were included as tax deductions as well. I have give an accolade of credit to Susan Collins as she’s a Republican but a moderate one with good common sense. She is definitely not a member of the Tea Party or former Tea Party. This bill must now be reconciled with the House bill passed previously prior to approval by President Trump.
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…

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 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.