Friday the 13th
Good Morning Traders,
As of this writing 4:20 AM EST, heres what we see:
US Dollar: Dec. USD is Down at 92.885.
Energies: Nov Crude is Up at 51.34.
Financials: The Dec 30 year bond is Up 1 tick and trading at 153.04.
Indices: The Dec S&P 500 emini ES contract is 1 tick Higher and trading at 2549.75.
Gold: The Dec gold contract is trading Up at 1298.10. Gold is 16 ticks Higher than its close.
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 Higher and Crude is trading Up+ 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 dont 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 Higher. As of this writing Europe is trading mainly Higher with the exception of the London exchange which is Lower at this hour.
Possible Challenges To Traders Today
- CPI is out at 8:30 AM EST. This is major.
- Core CPI is out at 8:30 AM EST. This is major.
- Retails Sales is out at 8:30 AM. This is major.
- Core Retail Sales is out at 8:30 AM EST. This is major.
- Prelim UoM Consumer Sentiment is out at 10 AM. This is major.
- Prelim UoM Inflation Expectations is out at 10 AM. This is major.
- Business Inventories is out at 10 AM EST. This is major.
- FOMC Member Evans Speaks at 10:25 AM. This is major.
- FOMC Member Kaplan Speaks at 11:30 AM. This is major
- Federal Budget Balance is out at 3 PM EST. This is major.
Weve 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 its liken to a seesaw, when up goes up the other should go down and vice versa.
Yesterday the ZB made its move at around 12:30 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 12:30 AM EST and the YM was moving Lower at the same time. Look at the charts below and youll see a pattern for both assets. ZB hit a Low at around 12:30 AM and the YM hit a High. These charts represent the newest version of Trend Following Trades and Ive changed the timeframe to a 30 minute chart to display better. This represented a Long 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. 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 10/12/17 |
|YM- Dec, 2017 10/12/17 |
Yesterday our bias was to the downside as the Bonds and Gold were trading Higher yesterday morning and this usually reflects a downside bias. The markets didnt disappoint as the Dow dropped 32 points and the other indices lost ground as well. Today we arent dealing with a correlated market and our bias is Neutral.
Could this change? Of Course. Remember anything can happen in a volatile market.
Yesterday we had a virtual mini tsunami eco news wise as there were 9 different reports, most of which were major and could have moved the markets in any direction. Yesterday morning we called for a downside bias as we simply followed our rules of Market Correlation and they didnt disappoint or let us down. All 3 major US exchanges lost ground and dropped yesterday regardless of economic news. Today we are faced with a similar situation as we have 9 economic news reports again and its Friday the 13th which could be very good or bad depending on your point of view. But as in all things, only 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-correlation-is-market-direction/
As readers are probably aware I dont trade equities. While were on this discussion, lets define what is meant by a good earnings report. A company must exceed their prior quarters earnings per share and must provide excellent forward guidance. Any falloff between earning per share or forward guidance will not bode well for the companys shares. This is one of the reasons I dont trade equities but prefer futures. There is no earnings reports with futures and we dont have to be concerned about lawsuits, scandals, malfeasance, etc. Anytime the market isnt correlated its giving you a clue that something isnt right and you should proceed with caution. Today our bias is Neutral. Could this change? Of course. In a volatile market anything can happen. Well 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 November Crude dropped to a low of $50.15 a barrel. It would appear at the present time that crude has support at $49.56 a barrel and resistance at $51.84. This could change. Well 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 November. 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 havent 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 doesnt 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. Well 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.
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 todays market is crucial. We as traders are faced with numerous challenges that we didnt have a few short years ago. High Frequency Trading is one of them. Im 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 its 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, youll also receive our daily Market Bias video that is only available to subscribers.