This newsletter provides free market direction trading insights that are derived from our seasoned and unique, inter-market analysis. We hope that this information will provide both the novice and seasoned trader with valuable assistance. Our approach is to harvest clues from the Market's “tea leaves” as to what the market is doing or is likely to do.
February 21, 2013
Good Morning Traders,
As of this writing 4:25 AM EST, here’s what we see:
US Dollar –Up at 81.515 the US Dollar is up 315 ticks and is trading at 81.515
Energies – April Oil is down at 93.77.
Financials – The 30 year bond is up 20 ticks and is trading at 143.23.
Indices – The March S&P 500 emini ES contract is down at 1501.50 and is down 22 ticks.
Gold – The April gold contract is trading down at 1567.00 even and is down 110 ticks.
This is a correlated market, unfortunately it is correlated to the downside. The dollar is up+ and oil is down- which is normal and the 30 year bond is trading up which correlates with the US dollar 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 the US dollar is trading higher. Gold is trading lower which correlates 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.
All of Asia closed lower. As of this writing all of Europe is trading lower.
Possible challenges to traders today is the following:
- Core CPI is out at 8:30 AM EST. This is major.
- CPI is out at 8:30 AM EST. This is major.
- Unemployment Claims are out at 8:30 AM EST. This is major.
- Flash Manufacturing Index is out at 9 AM EST. This is major.
- Existing Home Sales are out at 10 AM EST. This is major.
- Philly Fed Manufacturing Index is out at 10 AM EST. This is major.
- CB Leading Index is out at 10 AM EST. This is not major.
- Natural Gas Storage is out at 10:30 AM EST. This will move the Nat Gas market.
- Crude Oil Inventory is out at 11 AM EST. This will move the crude market.
- FOMC Member Bullard speaks at 12:30 PM EST. This is major.
Yesterday we said our bias was toward the long side because at the time we viewed the markets, they were correlated. We also stated that the FOMC Meeting Minutes would make trading erratic, which it did. The Dow closed 108 points lower and set off a world wide chain reaction. Asia closed lower to the tune of triple digits and currently Europe is doing the same. Today market correlation is calling for a lower open and our bias is toward the short side. Here's why. All the exchanges in Asia closed lower, some to the tune of triple digits. All of Europe is trading lower, also to the tune of triple digits. The futures markets are completely correlated to the downside with the USD trading north of the 81 mark. I don't recall the last time the USD was trading that high. Gold which has an inverse relationship with the USD is trading lower. Today we have 11 reports, most of which are major. If there was ever a volatile market, this is it. Could this change? Of course. Remember anything can happen in a volatile market.
It would appear as though the markets didn't like what came out of the FOMC Meeting Minutes. Apparently the Fed is now going to hold a debate in March as to how to proceed with Quantitative Easing. This suggests disunity of which the market doesn't take kindly to. Remember the markets do not like uncertainty when it comes to policy. Ironically if you look at a chart for the Dow on yesterday's trading action, you will notice that immediately after 2 PM EST, the Dow almost made parity with Tuesday's close and would have exceeded it except it didn't like what it heard. This set off a chain reaction that resonated world wide. I would say if there was ever a day to stay out of the market, this is it. There's far too much volatility and too many reports that will be released in a day's time. This can make trading very erratic and sometimes it's far better to keep your powder dry and fight another day. Remember that as traders, your number one rule is to preserve your trading capital because without it there is no trading.
For some time now we've been saying that next round of challenge for traders will be the sequester cuts scheduled to start on March 1st. March 1st is 8 days away and yet no one is raising this as any issue relative to the economy or markets in general. It seems to me that everyone is betting on the concept that at the very last moment Congress will come together and get something done. Just so you're aware of what will be cut if Congress does not come to terms on this issue:
- Small Business
- FDA Food Inspections
- Research and Development
- FBI and law enforcement
Yesterday Senator McCain got a piece of the right wing's mind when he listened to a tirade from the Tea Party faithful. They asked him "where's the fence"? You mean the 700 mile fence that's supposed to cover a 2,000 mile border? That Fence? And of course the only thing that will keep out the illegals are guns. Here's a wake-up call for the wing nuts; if we don't resolve this sequester issue one of the things that will get cut is Border Patrol. You know, the officers that are supposed to keep the illegals out. They should be careful about what they wish for as they just might get it. Now we're hearing that Speaker Boehner is blaming the President for the sequester. Problem is, back in 2011 he inserted the sequester in an overhead slide that was incorporated in the bill that created the sequester. The sequester came about because a panel was created representing 50% GOP and 50% Democrats to determine how to balance the budget within a ten year window. The problem was neither side could determine what to cut, hence automatic cuts aka the sequester. To boot, the House of Representatives isn't even in session to determine how to proceed, so it would seem to me that Boehner & Company want the sequester to happen. This would fall in line with their objective to starve the government. The problem is it won't be the government that starves, it will be the people that do.
This is the new and improved GOP in action. They won't outwardly hold the country hostage as they did in 2011; they'll set up events such that it works out that way. So come March 1st they'll just innocently sit back and say "oh well we have to cut, it's the law you know." I've been wondering why they're so eager to extend the debt ceiling. They're waiting for a tsunami of events to occur such that there will be no other alternative. If you're wondering what this has to do with markets; I would say to you everything. Look at what happened during the recent fiscal cliff crisis. If you're wondering why we haven't had correlated markets since the election, look no further. The markets do not like uncertainty when it comes to fiscal issues and anything that reeks of uncertainty is not viewed in a positive light. The Smart Money is loving it because thus far they made any issues about March 1st or sequester spending cuts. Will the markets survive? of course. But it also seems to me that the GOP knows all too well that Congress will only act when it has to. In other words, they know that DC drags it's feet when it comes to spending cuts and they've setup events such that it has to happen.
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 market correlation is calling for a higher open and our bias is towards the long side. Could this change? Of course. In a volatile market anything can happen. We'll have to monitor and see. For awhile now we've promised a video on how a trader can use Market Correlation in tandem with their daily trading. A good friend of Market Tea Leaves: Carl Weiss of Sceeto and I produced a video on December 22nd that shows this. Here it is:
Please note the video is about a half hour in length and we plan on producing more in the near future. Also note that in the near future we will have other videos where we will interview various trading leaders.
Oftentimes we listen to traders talk about problems and issues they are confronted with. One issue that keeps re-surfacing deals with trader psychology. Now I can deal with a market issue, I can deal with a trading issue but I'm not a trading psychologist. A good friend of Market Tea Leaves, Mr. Norman Hallett has been a leader in this field for over 20 years. I've followed his work for over 8 years and I highly recommend it. You can view Norman at:
As I write this the crude markets are trading lower and the US Dollar is advancing. This is 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 crude went to a low of 94.21. So it would seem that at the present time crude's support is at 92.00 with resistance at 98.50 a barrel. 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.
- Sequester spending cuts to commence around early March
- Debt Ceiling in the May time frame.
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 7 AM EST, 9 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. If you feel compelled to trade, consider doing so after 11 AM EST when the inventory numbers are released and the markets give us better direction. 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 blogs.
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Posted-In: Economics Markets Trading Ideas