Good Morning Traders,
As of this writing 5:40 AM EST, here’s what we see:
US Dollar –Up at 79.585, the US Dollar is up 41 ticks and is trading at 79.585.
Energies – May Oil is down at 98.61.
Financials – The June 30 year bond is currently is up 4 ticks and trading at 133.03.
Indices – The June S&P 500 emini ES contract is up 6 ticks and trading at 1865.25.
Gold – The April gold contract is trading down at 1346.90 and is down 121 ticks from its close.
Initial Conclusion: This is not a correlated market. The dollar is up+ and oil 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 higher and the US dollar is trading up which is not correlated. Gold is trading lower 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.
Asia traded mainly lower with the exception of the Aussie and Nikkei exchanges which traded higher. As of this writing Europe is trading mixed with half the exchanges lower and the other half higher. Please note: whereas the US markets are currently on Daylight Savings Time, this does not occur in Europe until March 30th. Instead of opening at 3 AM EST, for the next 3 weeks Europe doesn't open until an hour later at 4 AM EST.
Possible challenges to traders today is the following:
1. Current Account is out at 8:30 AM EST. This is not major.
2. Crude Oil Inventories is out at 10:30 AM EST. This could move the crude market.
3. FOMC Economic Projections is out at 2 PM EST. This is major.
4. FOMC Statement is out at 2 PM EST. This is major.
5. Federal Funds Rate is out at 2 PM EST. This is major.
6. FOMC Press Conference starts at 2:30 PM EST. This is major.
Yesterday the Swiss Franc made it's move at around 7:50 AM EST. Now you might be asking "isn't that a bit unusual?" The answer is yes for reasons I'll explain below. Look at the charts below and you'll see a pattern for both assets. The USD hit a low at around that time and rose. In the meantime the Swiss Franc fell. This was a shorting opportunity on the Swiss Franc. The key to capitalizing on these trades is to watch the USD movement. The USD rise only lent confirmation to the move. As a trader you could have netted about 20-30 ticks on this trade, whereas this may not seem like much understand that each tick on the Swiss Franc is worth $12.50. To expand the chart, right click and open in a new window. Kindly view our special video to determine how to capitalize on these trades. http://youtu.be/lOxBMe09X3Q
As an add-on to the above video, we created a new one entitled How to Trade the Swiss Franc in a Volatile Market. I trust you'll find it interesting and thought provoking. It can be viewed at: http://youtu.be/6cCyR43Qb3Y
Charts Courtesy of Trend Following Trades
|Swiss Franc - June, 2014 -3/18/14|
|USD - June, 2014 - 3/18/14|
Yesterday we said our bias was to the downside as the futures were nearly correlated to the downside. For reasons that I'll explain in the commentary, that didn't happen. As such the Dow gained 89 points and the other indices gained as well. Today is FOMC Day and as such our bias is neutral which means teh markets could go in any direction. Could this change? Of Course. Remember anything can happen in a volatile market.
Yesterday the futures were nearly correlated to the downside with the exception being crude. If crude were trading down yesterday morning I would have said it was completely correlated to the downside. But then at 7:50 AM EST, a funny thing happened. Russian President Putin formerly annexed Crimea to the Russian Federation. So much for recognizing Crimea as "sovereign". I assumed that this would happen but I thought it would happen later as opposed to sooner. Wasn't there supposed to be a debate on this in the Duma (Congress)? So much for "democracy" in Russia. Apparently there was no debate or deliberation about this. Russia has just set itself up as a puppet regime and the thought of democracy is a joke. The EU is furious about this and President Obama has decided he's going to organize the G7 meeting. I wonder what surprise he'll have in store for Putin and his puppets? This is the reason why the Swiss Franc moved at 7:50 AM EST and the markets took off. After all, nothing can sooth a market better than finality. Right? The only problem is I don't think this is over. But we say every day anything can happen in a volatile market..
On another note today is FOMC Day and given that we haven't had one in awhile, we should consider what will be said and what actions taken today. It is rumored that Jane Yellen will change her tone on interest rates and possibly tapering. Notice I said "rumored" as I don't think she will. She still knows that the economy is precarious at best and this "recovery" is still quite fragile. She also knows that real unemployment is still too high and as such I don't think she'll be changing interest rate policy anytime soon. As far as tapering is concerned; that's another story as I don't think they'll stop that either, but as always time will tell...
Each day in this newsletter we provide viewers a snapshot of the Swiss Franc versus the US dollar as a way and means of capitalizing on the inverse relationship between these two assets. Futures Magazine recognized this correlation as well. So much so that they printed a story on it in their December issue. That story can be viewed at:
Many of my readers have been asking me to spell out the rules of Market Correlation. Recently 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:
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:
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 trading lower and the US Dollar is advancing. This is not normal. Think of it this way. If the stock market is trading lower, it's safe to assume that the crude market will follow suit and vice-versa. Crude trades with the expectation that business activity is expanding. The barometer of which is the equities or stock market. If you view both the crude and index futures side by side you will notice this. Yesterday May crude dropped to a low of 97.59 a barrel. We'll have to monitor and see if crude either goes lower or holds at the present level. It would appear at the present time that crude has support at $97.52 a barrel and resistance at $100.15. This could change. All we need do is look at what happened last fall when crude was trading over $100.00 a barrel. We'll have to monitor and see. Remember that crude is the only commodity that is reflected immediately at the gas pump.
If trading crude today consider doing so after 10:30 AM EST when the inventory numbers are released and the markets gives better direction. While we're on the subject of crude Futures Magazine has decided to print an article we produced on crude and how to trade it. That article can viewed at:
Last Wednesday crude oil inventory numbers was released and crude dropped dramatically. As such I created a video to show how Market Correlation could be used in tandem with a crude trade. The video can be viewed at: http://youtu.be/aTgbhah_U4I
- Budget - Last week it was revealed that President Obama has plans for salaried workers to get paid overtime if they work over 40 hours a week. The threshold is $455.00 a week; so if a salaried worker makes more than $455.00 a week then they'll be entitled to overtime pay. Pardon my saying so but are the folks in DC completely out of their minds? Their rational? Employers will be forced to hire more part time workers, thereby reducing the actual unemployment rate of 12.3%. So instead of focusing on growing the economy to make it more palatable to hire workers. let's force them to hire more part time workers. One of the reasons why the unemployment rate is so high is because most of those people can't work a part time job at minimum wage because it isn't enough to pay bills. In other words, it's not a living wage. This is another example of DC gone mad. First, employers will devise a workaround to this idea if it ever comes to light and secondly, this President should be more focused on growing the economy as opposed to looking at it from a finite point of view. While we're on the subject he should be looking at the "affordable" care act which quite frankly isn't so affordable. What do I mean? Yes, if you earn less than a certain amount of income you can get a subsidy to help pay for health insurance. But have you seen the out-of-pocket costs for those plans? In the Garden State you have a medical deductible, a hospital deductible and a total out-of-pocket deductible that if you're ever hospitalized will cost you dearly. Employers today can tell their workers to go out under Obamacare if they don't like what's offered. So what's offered? A high deductible plan with a low premium that employers don't pay 100% for. So the worker has to pay a premium for the plan and be saddled with a high deductible to boot. Employers will not have to pay a penalty for NOT offering insurance until 2016. This is not a good deal for the American worker and this President should have thought about what could happen before starting down this path. He can't raise the minimum wage and just now the Senate has voted on a plan to extend UI after months of deliberation.
Crude oil is trading lower and the US Dollar is advancing. 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.
Forex Crunch, a friend of Market Tea Leaves published an article on the Smart Money whereby we define who they are and what they do. This article can be viewed at: http://www.forexcrunch.com/who-are-the-smart-money-and-what-do-they-do/
Nick Mastrandrea is the author of Market Tea Leaves. Market Tea Leaves is a daily newsletter dedicated to a trader's success. We discuss and teach 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.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.