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 19, 2013
Good Morning Traders,
As of this writing 4:00 AM EST, here’s what we see:
US Dollar –Up at 80.645 the US Dollar is up 69 ticks and is trading at 80.645
Energies – April Oil is down at 95.83.
Financials – The 30 year bond is up 4 ticks and is trading at 143.19.
Indices – The March S&P 500 emini ES contract is up at 1517.75 and is up 3 ticks.
Gold – The April gold contract is trading up at 1613.00 and is up 35 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 up which correlates with the US dollar trading up. The Financials should always correlate with the US dollar such that if the dollar is lower then bonds should follow and vice versa. However the indices are up and the US dollar is trading higher. Gold is trading higher which does not correlate 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.
With the exception of the Aussie and Singapore indices (which closed fractionally higher) the rest of Asia closed lower. As of this writing all of Europe is trading higher.
Possible challenges to traders today is the following:
- NAHB Housing Market Index is out at 10 AM EST. This is major.
- Lack of major economic news.
On Friday we said our bias was toward the short side and despite the fact that the markets spent most of the day in negative territory, the Dow closed 9 points higher. Please be aware that this occurred in the last 10 minutes of trading of Friday, which is to say that some entity wanted the Dow to close higher going into a 3 day holiday weekend. Market correlation is calling for a lower open but our bias is toward the long side. Here's why. Historically speaking after a 3 day holiday weekend the market generally tends to move higher. The reason I suspect this is the case is because there is pent up demand given the fact that no trading took place yesterday. As of this writing Europe is trading higher. Could this change? Of course. Remember anything can happen in a volatile market.
Here's a short video on Friday's close:
Yesterday Mario Draghi decided to hold a press conference at 9:30 AM EST in which he pretty said what he said earlier in the month. That is that the Euro's exchange rate was a measure of inflation but not a policy target. In other words "we're not waging a currency war (wink,wink) even though in reality we are." No sooner did he say that when the Euro dropped and the USD rose in value. Gratefully the US markets weren't open, if they were the markets here would have dropped, just as they did earlier in the month. For those of you who read my Special Edition yesterday I outlined why it's in the best interest of any region to have a lower valued currency. In essence it means that the region's goods and services will cost less and thereby prop up volume. More volume, more sales, more economic growth, greater prosperity. Ironically Asia did not respond well to this as the major markets there dropped to the tune of triple digits. Today at 5 M EST Europe will release the German Zew Economic Sentiment number which is liken to the UOM numbers that we use here. This will clearly have an impact on European trading later this morning.
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 less than two weeks 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
This past weekend Senator John McCain stated that he feels Congress will soon have a gun control bill that both parties will pass. It's yet to be seen what this bill contains but I have no doubt that the bill will be a watered down version of what's needed. Doesn't it strike anyone odd that we had the exact same issues in the early 1990's before the Clinton Era. At that time Bill Clinton did sign into law a bill banned automatic weapons for 10 years. No sooner had that law expired when background checks relaxed and anyone could buy a weapon at a gun show with no background check. Clinton recipe was simple "have a growing, thriving economy and these issues will be resolved." The former Speaker of the House Newt Gringrich also stated that the reason the GOP lost in November was because of lack of technology. In other words we didn't do a good job of communicating our message. I would say there's no issue with technology. We had IPhones, IPads, cell phones in November just as we do now. The issue was the American people didn't like the message and therefore re-elected this President. I don't get the impression that the GOP is done obstructing. Time will tell and we'll soon see.
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.
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 high of 97.77. 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 10 AM EST when the economic news is 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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