Market Tea Leaves - What's Next?

Pre-Market Global Review - 1/3/13 - What's Next?

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.

January 3, 2013

Good Morning Traders,
As of this writing 4:30 AM EST, here’s what we see:

US Dollar –Up at 79.985 The US Dollar is up 32 ticks and is trading at 79.985.
Energies – February Oil is down at 92.77.
Financials – The 30 year bond is up 3 ticks and is trading at 145.26.
Indices – The March S&P 500 emini ES contract is down at 1454.00 and is 12 ticks lower.
Gold – The February gold contract is trading down at 1686.10 and is down 29 ticks.

Conclusion
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 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 down which correlates with the US dollar trading up. Gold is trading down and the US dollar trading up (which is correlated). 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 higher. As of this writing, all of Europe is trading lower.

Possible challenges to traders today is the following:

- Challenger Job Cuts is out at 7:30 AM EST. This is major.
- ADP Non-Farm Payroll Change is out at 8:15 AM EST. This is major.
- Unemployment Claims is out at 8:30 AM EST. This is major.
- Total Vehicle Sales are out all day by brand. This is not considered major.
- FOMC Meeting Minutes are out at 2 PM EST. This is major.

Yesterday from the opening bell the market zoomed up 250 points and stayed there pretty much all day. The Dow closed 309 points higher. Nothing quite like a fiscal cliff deal to drive the markets higher. As we've stated previously, anything can happen in a volatile market. Today the 113th Congress gets sworn in and the issue will be who will be the next Speaker of the House? Will John Boehner get re-elected as the Speaker? Pragmatically speaking, I think not. John Boehner isn't conservative enough for the radical wing of the GOP and not liberal enough for the Democrats. The question is who will take his place? Eric Cantor? Paul Ryan? Sometimes it pays to be careful of what you wish for as I think anyone else appointed will be far less open to negotiation than John Boehner.

On a personal note. Governor Christie of New Jersey did not have any kind comments for the current Speaker of the House as New York and New Jersey were promised funds to help rebuild after Hurricane Sandy. I live in New Jersey. I've seen firsthand the devastation this storm brought to this area. I'm grateful that my property wasn't severely affected but I know many people who cannot say that. It is 66 days since this storm hit and there are no Federal Funds to speak of. The issue that Christie has is a vote was to be taken on Tuesday night at the same time the Fiscal Cliff Bill was passed but Mr. Boehner decided it was too much for conservatives to deal with and decided to scrap the vote.

The passed Fiscal Cliff bill does not address spending and this was a sore point for the GOP. Sequestration will start two months from now as Secretary Geithner has taken "extreme measures" to buy two months to address spending cuts. It would seem to me that 2013 will be this type of year where we have political dogfights in DC over spending. Ironically enough at around the same time that we have sequestration issues we will also have issues over the debt ceiling. The debt ceiling is far more lethal than the recent fiscal cliff as this can effect the rating of US government debt. This will be liken to Summer, 2011 whereby Standard & Poors dropped the triple A rating of US government debt to double A. The debt ceiling issue must be addressed as it can effect foreign investment in the United States and the US government will in effect run out of money to pay obligations. It's similar to getting an increase on your credit card limit.

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 could be excellent and change everything or conversely The Smart Money could decide to take money off the table given the recent market run-up. 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:

http://youtu.be/Ysx-nOgAtkI

Please note the video is about a half hour in length and we plan on producing more in the near future.

Additionally Carl and the folks at Sceeto will be hosting a free webinar today that starts at 11:45 AM EST and lasts about 45 minutes. I know this is short notice, but if you can attend it is well worth it as you will learn more about Order Flow and it effects the markets. The link is:

https://www1.gotomeeting.com/register/340398137

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. Yesterday Crude hit an intra-day low of 92.56 a barrel after hitting a high of 93.87. That would suggest to me that $90 a barrel is now the support threshold for crude. Crude has maintained this level for 3 consecutive trading days. In terms of where its resistance level is, that is yet to be determined. We'll have to monitor and see. Remember that crude is the only commodity that is reflected immediately at the gas pump.

Future Challenges:

- Earnings Season starts next Monday, January 7th
- Sequester spending cuts to commence around early March
- Debt Ceiling also around the early March 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 today then consider doing it after 10 AM EST when the economic news is released and the market gives us direction. 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.