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Market Tea Leaves - Options Expirations

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Pre-Market Global Review - 1/18/13 - Options Expirations

 

 

 

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 clues from the Market's “tea leaves” as to what the market is doing or is likely to do.

January 18, 2013

Good Morning Traders,
As of this writing 3:45 AM EST, here’s what we see:

US Dollar –Up at 79.795 The US Dollar is up 84 ticks and is trading at 79.795.
Energies – March Oil is down at 95.90.
Financials – The 30 year bond is down 2 ticks and is trading at 145.04.
Indices – The March S&P 500 emini ES contract is up at 1477.00 even and is up 5 ticks.
Gold – The February gold contract is trading up at 1691.50 and is up 11 ticks.


Conclusion
This is not a correlated market. The dollar is up+ and oil is down- which is normal but the 30 year bond is trading up fractionally which does not correlate 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. The indices are up with the US dollar trading higher. Gold is trading up 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.

All of Asia traded higher on the news that the Chinese economy expanded by 7.9%. As of this writing all of Europe is trading higher.


Possible challenges to traders today is the following:


- Preliminary UOM Consumer Sentiment is out at 9:55 AM EST. This is a major report.
- Preliminary UOM Consumer Inflation Expectations are out at 9:55 AM EST. This is major.


Yesterday we mentioned that our bias for the market was on the long side with the net result being that the Dow closed 85 points higher. Today we have options expiration which is always volatile. You'll notice that I now list March Crude as opposed to February. This is because March is now considered the front month. Today market correlation is calling for a lower open but our bias is towards the short side. The reason for this is because the USD is currently trading higher and it appears as though the Bonds will start to trade higher. As I write this Gold has just turned negative which correlates with a stronger dollar. I would never underestimate the power of the USD to move markets. Could this change? Of course. Remember anything can happen in a volatile market.

Last night the Chinese revealed that their economy grew by 7.9%. This was enough to send the Asian markets higher and as of this writing Europe is up as well. The question today is whether or not this news alone can send the US markets higher. Today we don't have much in the way of economic news. We do however have options expiration and this alone will make for a volatile session. Options expiration is volatile because the Smart Money also invests in options and believe me they are intent to make money. It is possible to make money on options IF you're on the right side of the market. Attempting to trade futures on a day like today is tough because the market may be driven in all different directions during the trading day with no trend in sight. This is a day where I would prefer to keep my capital and my powder dry so to speak.

On the political front it seems as though President Obama has fired the opening shot of what will turn out to be a fierce Congressional battle. Obama warned the GOP on the debt limit and I suspect he knows its going to have to be raised. I would expect that as this quarter wears on we'll much more activity in this area as either the debt ceiling is going to be raised or spending will be cut or both. As always we'll have to monitor and see. I expect the infighting will occur in mid-February as the government will start to run out of money and hence the battle commences. Yesterday the President signed an Executive Order to explore the prospect of increased gun control. This was based on a report issued by Vice-President Biden on what should be done. He is calling for increased background checks, a ban on military style assault weapons with less bullets per clip. Of course, the NRA (and therefore the GOP) are up in arms about this and are equally determined to combat any measure of gun control. Look at some of the ads the NRA has released already. As opposed to gun control they want every school to have armed police and have suggested that teachers should carry guns. I don't know about you but I don't know of any teacher that wants to carry a gun to school. Mind you the President issued an Executive Order to explore the possibility of increased gun control, he didn't sign a bill and yet the right wing is attacking already.

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.


For those of you who trade stocks, another good friend of Market Tea Leaves: Mr. Hubert Senters has created a video that describes how a trader can trade stocks that beat earnings 80 percent of the time:

http://www.tradethemarkets.com/public/StocksthatBeatEarnings80oftheTime.cfm

 

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. We could have excellent economic reports today. 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:

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. Also note that in the near future we will have other videos where we will interview various trading leaders.

As an add-on benefit, Carl Weiss has also created a 5 minute video on HFT and Algo Trading; it can be viewed at:

http://www.youtube.com/watch?v=yhE2UKAeeC0

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 exceeded the 96.00 a barrel mark. So it would seem that at the present time crude's support is at 92.00 with resistance at 97.00 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.

Future Challenges:

- 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. Be very careful trading this commodity today. Today is options expiration and this lends a new wrinkle of volatility. 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.

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: Trading Ideas

 

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