Awaiting Fiscal Cliff Talks

Market Tea Leaves

Pre-Market Global Review - 12/27/12 - Awaiting Fiscal Cliff Talks

The purpose of this newsletter is to hopefully provide the novice trader with some insight as to market direction. The idea is to provide some clues or “tea leaves” as to what the market is doing or is likely to do.

December 27, 2012

Good Morning Traders,
As of this writing 4:40 AM EST, here’s what we see:

US Dollar –Down at 79.490 The US Dollar is down 214 ticks and is trading at 79.490.
Energies – February Oil is up at 91.21.
Financials – The 30 year bond is down 6 ticks and is trading at 147.09.
Indices – The March S&P 500 emini ES contract is up at 1414.50 and is 4 ticks higher.
Gold – The February gold contract is trading down at 1658.90 and is down 18 ticks.

Conclusion
This is not a correlated market. The dollar is down- and oil is up+ which is normal and the 30 year bond is trading down which is correlated. 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 up which does correlate with the US dollar trading down. However Gold is trading down and the US dollar trading down (which is not correlated). So it would appear as though Gold is the culprit. 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. Bear in mind that this is the first full trading day since the Christmas break as Europe is now trading.

With the exception of China's Shanghai and India's Sensex Indices the rest of Asia closed higher. As of this writing Europe is trading higher.

Possible challenges to traders today is the following:

- Unemployment Claims are out at 8:30 AM EST. This is a major report.
- CB Consumer Confidence is out at 10 AM EST. This is a major report.
- New Home Sales are out at 10 AM EST. This is a major report.

Yesterday we said that Market Correlation called for a lower open. The net result? The Dow closed 24 points lower. It's ironic that when the markets aren't correlated, they tend to go lower. It didn't start out that way though. My own subjective opinion is we had an abbreviated session on Monday, the markets were closed on Tuesday; so traders were pumped to making a trade. This plus the news that Obama was cutting his holiday short, sent the markets higher initially. However as soon as the markets realized that he wouldn't be back until Thursday (today) it took the wind out of their sails so to speak. Secretary Geithner is now claiming that the US will technically hit the fiscal cliff on December 31st but he will authorize "extraordinary measures" to avoid a technical violation. President Obama now knows he needs 60 votes in the Senate to avoid a filibuster and get something passed. If he can do that then he wouldn't need approval from the House. In fact the House is not back in session and won't be unless called back by Congressional Leaders. Obama wants to pass a scaled down version that would maintain tax cuts for those Americans making less than $250,000 per year and extend unemployment benefits. This would at least buy the Washington crowd time to formulate a plan. This is Summer, 2011 all over again. It's now blame game time in DC whereby the GOP will blame the Dems and vice-versa. It will be interesting to see how this plays out, but until the fiscal cliff is resolved we will have a volatile market. 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 lower open. Could this change? Of course. The economic news that we get today may drive the markets and they are all considered major reports. Understand what is meant by a stellar report. If the report meets expectation but doesn't exceed them; then it's not a stellar report. Economic news must exceed expectation to be considered stellar. This is liken to a firm reporting earnings during the height of earnings season. Note: in the future we will be producing videos on Market Correlation and how you can use them in your daily trading. More on this soon.

As I write this the crude markets are trading higher with the US dollar trading lower. 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. Crude is trading north of $90 a barrel, as such we should beware of a pullback. If Crude maintains this level for 3 consecutive trading days, then it would signal a new threshold. Until that time is should be held as suspect because it can easily retreat to below $90 a barrel. Remember that crude is the only commodity that is reflected immediately at the gas pump.

The fiscal cliff remains front and center in terms of market drivers. This will hold until either year end or it is resolved.

Crude oil is trading higher and the US Dollar is declining. 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 then consider waiting until after 10 AM after the economic news is released and gives us a better sense of direction. 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.