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 11, 2013
Good Morning Traders,
As of this writing 5:15 AM EST, here’s what we see:
US Dollar –Down at 80.270the US Dollar is down 46 ticks and is trading at 80.270
Energies – March Oil is up at 95.81.
Financials – The 30 year bond is down 9 ticks and is trading at 143.13.
Indices – The March S&P 500 emini ES contract is up at 1516.75 and is up 16 ticks.
Gold – The April gold contract is trading down at 1664.50 and is down 34 ticks.
This is a nearly 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 up and the US dollar is trading lower. Gold is trading down which does not correlate with the US dollar trading higher. 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 was closed for a bank holiday, the Aussie and Sensex closed lower with the rest of Asia closing higher. As of this writing all of Europe is trading higher.
Possible challenges to traders today is the following:
- Eurogroup Meetings - All Day. This is major.
- FOMC Member Yellen speaks at 1 PM EST. This is major.
- Lack of solid economic news for the US markets.
On Friday the Dow closed 49 points higher, despite the fact that the markets weren't correlated. It only goes to show you that anything can happen in a volatile market. Today market correlation is calling for a higher open and our bias is toward the long side. Here's why. The markets are nearly correlated with the only missing ingredient being Gold. If Gold were trading higher I would say we had a completely correlated market. Additionally Bonds are trading lower which is indicative of a bullish stance in stocks. Remember most people view Bonds as the safe haven. As of this writing all of Europe is trading higher. Could this change? Of course. Remember anything can happen in a volatile market.
On Friday we said our bias was towards the short side because the Bonds were trading higher and Gold did not commit to any one direction. Additionally we didn't think the Smart Money (aka Institutionals) were done taking money off the table. Today we have a different situation where the USD and Bonds are committed to the short side with oil and the indices both trading higher. The only missing ingredient is Gold and I suspect that if the market opens higher and stays higher, Gold will move to the upside but as in all things with this market; we'll have to monitor and see. While we're on the subject, one thing I noticed this past week is that each time the Dow hits the 14,000 mark, it retreats. This happened last Monday after Jobs Friday when the market closed above 14,000 and retreated. It also happened on Friday when the Dow exceeded 14,000 during the trading day but then fell off. Time will tell if 14,000 is the resistance point for the Dow but thus far it appears that way.
On the political front it appears as though sequester spending cuts is making its way to the forefront as Democrat Dick Durbin and Republican Eric Cantor faced off yesterday on Meet the Press. Durbin supports the President's agenda of equality between spending cuts and tax revenue and of course, Cantor doesn't. The GOP point of view seems to be "you got increased revenue out of us during the fiscal cliff crisis, don't expect anymore." 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
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. President Obama will give the State of the Union address on Tuesday night, so it will interesting to see how this plays out.
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 and our bias is towards the short 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 97.20 a barrel mark but fell dramatically after the ECB conference. 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 Janet Yellen will be speaking at 1 PM EST today. Because Janet Yellen is considered the "heir apparent" to Ben Bernanke, she does have the power to move the markets, so be aware. 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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