Market Tea Leaves - Over the Cliff With A Parachute
Pre-Market Global Review - 1/2/13 - Over the Cliff with a Parachute
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 2, 2013
Good Morning Traders,
As of this writing 6:20 AM EST, here’s what we see:
US Dollar –Down at 79.610 The US Dollar is down 241 ticks and is trading at 79.610.
Energies – February Oil is up at 92.66.
Financials – The 30 year bond is down 43 ticks and is trading at 146.04.
Indices – The March S&P 500 emini ES contract is up at 1445.25 and is 101 ticks higher.
Gold – The February gold contract is trading up at 1683.00 and is up 72 ticks.
Finally we have a correlated market. The dollar is down- and oil is up+ which is normal and the 30 year bond is trading down 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 up which correlates with the US dollar trading down. Gold is trading up and the US dollar trading down (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.
Even though the Nikkei Index was closed for a bank holiday on Monday, the rest of Asia closed higher. As of this writing, all of Europe is trading higher.
Possible challenges to traders today is the following:
- Final Manufacturing PMI is out at 9 AM EST. This is not considered major.
- ISM Manufacturing PMI is out at 10 AM EST. This is major.
- Construction Spending is out at 10 AM EST. This is major.
- ISM Manufacturing Prices is out at 10 AM EST. This is not considered major.
On Monday the Dow closed 166 points higher although in the opening minutes it opened 54 points lower. Despite the fact that Market Correlation called for a lower open, all it took was rumor that something would be passed and the fiscal cliff would be avoided. As we've stated previously, anything can happen in a volatile market. Technically the United States did go over the fiscal cliff as nothing was passed on Monday, December 31st. The Senate did approve the bill but the House would not meet until 12 Noon on January 1st. At first it appeared as though the House might send the bill back to the Senate with amendments. This would have killed it and the process would have to start all over again with a new Congress sworn in. However the gravity of the situation took center stage and the House decided to pass the bill as is with no amendments. Final vote 257-167 in favor of the bill. If you recall we've stated no one wants the blame of tossing the economy over the cliff.
The 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 higher open. Could this change? Of course. The Smart Money could decide to start the January Effect early or they could be thinking "the market's gone up, let's go short". 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.
As I write this the crude markets are trading higher with the US dollar trading lower. 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. On Monday Crude hit an intra-day low of 90.00 a barrel and held. 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.
- 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 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 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.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.