Market Tea Leaves - Over the Cliff?
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Pre-Market Global Review - 12/31/12 - Over the Cliff?
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 31, 2012
Good Morning Traders,
As of this writing 4:40 AM EST, here’s what we see:
US Dollar –Up at 79.850 The US Dollar is up 65 ticks and is trading at 79.850.
Energies – February Oil is down at 90.68.
Financials – The 30 year bond is unchanged and is trading at 148.12.
Indices – The March S&P 500 emini ES contract is up at 1390.00 even and is 24 ticks higher.
Gold – The February gold contract is trading up at 1667.20 and is up 113 ticks.
This is not a correlated market. The dollar is up+ and oil is down- which is normal and the 30 year bond is trading dead even which is not 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 not correlate with the US dollar trading up. However Gold is trading up and the US dollar trading up (which is not correlated). So it would appear as though Gold, Bonds and the Indices are the culprits. 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 closed mixed. The Nikkei Index was closed for a bank holiday, China's Shanghai Index closed higher but the rest of Asia closed lower. With the exception of the Paris Index the rest of Europe is trading lower. Please note that Germany's DAX Index is closed for a bank holiday.
Possible challenges to traders today is the following:
- No major economic reports for the US markets.
- Lack of major economic news.
- Awaiting Congressional Decision on fiscal cliff.
On Friday we said that Market Correlation called for a lower open. The net result? The Dow closed 158 points lower. It's ironic that when the markets aren't correlated, they tend to go lower. It seems as though the folks in DC are going to keep us on pins and needles throughout this process. The House did reconvene yesterday (Sunday) as promised bu apparently it was all for naught as the Senate decided close their session early and reconvene Monday at 11 AM EST. Apparently some members of the Senate decided that after working on Saturday they needed a break. Last night the GOP Senate Minority Leader met with Vice-President Biden as Harry Reid left the Capital. This would suggest to me that these two gents can't see eye-to-eye on anything. Let's examine what we know: the Senate will reconvene at 11 AM EST, even if they had a bill to vote on it still has to go thru the House as the Democrats won't have the super majority they need to override any filibuster. It then has to pass thru the House and the GOP has to sway the radical wing of their party to approve it and then President Obama has to approve it. It doesn't appear as though anything is going to get passed today. Obama is not going to back down on his pledge to raise taxes on the wealthy as ran his campaign on this issue and he knows that if he backs down, for the next 4 years he'll never get anything done. And he made it very clear on late Friday afternoon that anything he signs must contain taxes on the wealthy and an extension of unemployment benefits. It's going to be incumbent upon the GOP leaders to convince the radical wing of their party to agree to something. This will be their challenge. Another tact that DC can do is to wait a couple of days whereby a new Congress will get sworn in, This Congress will have more Democrats (although not a majority in the House) and then perhaps a bill will be forthcoming. 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. Congress could somehow get something passed and Obama signs it. 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.
As I write this the crude markets are trading lower with the US dollar trading higher. 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. On Friday Crude hit an intra-day low of 90.32 a barrel after reaching a high of 91.49. That is significant, we'll have to see if it maintains it. If Crude maintains this level for 3 consecutive trading days, then it would signal a new threshold. Until that time it 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 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 today then consider doing it prior to 11 AM EST before Congress reconvenes. But 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.
Posted in: Markets