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 12, 2013
Good Morning Traders,
As of this writing 5:00 AM EST, here’s what we see:
US Dollar –Down at 80.515 the US Dollar is down 126 ticks and is trading at 80.515
Energies – March Oil is up at 97.22.
Financials – The 30 year bond is down 5 ticks and is trading at 143.23.
Indices – The March S&P 500 emini ES contract is unchanged at 1513.00 even.
Gold – The April gold contract is trading down at 1644.20 and is down 16 ticks.
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 correlates with the US dollar trading down. 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 down which does not correlate with the US dollar trading lower. 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 mixed with the London and Paris exchanges trading fractionally higher and the German trading lower.
Possible challenges to traders today is the following:
- NFIB Small Business Index is out at 7:30 AM EST. This is not considered major.
- FOMC Member George speaks at 11 AM EST. This is not major.
- Federal Budget Balance is out at 2 PM EST. This could move the afternoon markets.
- Lack of solid economic news for the US markets.
Yesterday the Dow closed 22 points lower. It only goes to show you that anything can happen in a volatile market. Today market correlation is calling for a lower open and our bias is toward the long side. Here's why. The markets are nearly correlated to the upside with the only missing ingredient being Gold. If Gold were trading higher I would say we had a completely correlated market. Additionally the USD is trading lower which is conducive to a bullish stance. As of this writing Europe is trading mixed and has been moving in and out of positive territory all morning. Could this change? Of course. Remember anything can happen in a volatile market.
Yesterday we said our bias was towards the long side because both the USD and Bonds were trading lower and Gold did not commit to any one direction. Unfortunately after publishing this article the markets completely changed course and the USD and Bonds moved higher. It goes to show that anything can happen in a volatile market. As a followup to our discussion yesterday concerning the Dow resistance at 14,000; it would appear that for the foreseeable future, this is the case as the Dow broached the 14,000 mark yesterday but did not hit or exceed it.
On the political front tonight President Obama delivers the State of the Union address at 9 PM EST. No doubt he will talk about the Economy, Women's Rights, Immigration Reform and Gun Control. My guess is that he will also talk about the sequester cuts about to take place on March 1st. 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
After the State of the Union address it will be countered by the GOP but this year we will have two rebuttals: one from the Republicans delivered by Marco Rubio and the other by the Tea Party delivered by Rand Paul. It appears as though the GOP is split into two factions: moderates and the far right. This cannot bode well for the GOP. A famous Republican once said "a house divided cannot stand." The one thing we can count on is that they will both say we need to cut. The question is what method do we choose? I suspect the Tea Party has a more militant stance but the moderates will set things up such that there is no other choice.
But 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 lower open but 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.
Here's a video on what happened Thursday after the ECB:
As I write this the crude markets are trading higher and the US Dollar is declining. 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's crude number hit the 97.09 a barrel mark. So it would seem that at the present time crude's support is at 92.00 with resistance at 98.00 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 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, consider doing so after 10 AM EST when the markets give us better direction. Also we aware that this afternoon at 2 PM EST the Federal Balance Budget will be released and this has teh capacity to move the markets in the afternoon. 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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