Pre-Market Global Review - 7/29/13 - Market Correlation Article in Futures Mag
Good Morning Traders,
As of this writing 4:55 AM EST, here’s what we see:
US Dollar –Down at 81.655, the Sept US Dollar is down 109 ticks and is trading at 81.665.
Energies – September Oil is down at 104.12.
Financials – The September 30 year bond is up 3 ticks and is trading at 134.26.
Indices – The September S&P 500 emini ES contract is down at 1682.25 and is down 17 ticks.
Gold – The August gold contract is trading up at 1325.70 and is up 42 ticks from its close.
Initial Conclusion: This is not a correlated market. The dollar is down- and oil is down- which is not normal and the 30 year bond is trading higher. 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 lower which is not correlated. Gold is trading higher which is correlated with the US dollar trading down. 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 lower. As of this writing Europe is trading higher.
Possible challenges to traders today is the following
1. Pending Home Sales are out at 10 AM EST. This is major.
2. Lack of any other economic reports.
We've elected to include currencies in our coverage as it's universal and quite frankly market correlation can't exist without a discussion this topic. It goes without saying that the USD is the world's reserve currency and has been since 1944. Prior to that time the position was held by the British Pound, however due to the wartime effects of fighting Nazi Germany during WWII Britain could no longer maintain that standard. The rule in this regard is quite simple, when the USD advances other currencies go down. There is an ongoing currency war in the worldwide markets. As an example Japan recently and deliberately undermined the Yen with the intent of keeping its currency lower so as to prop up exports to other countries. This is the basis of "Abenomics" named after their Prime Minister Abe. Today I'd like to speak about the Aussie Dollar as it is one of the world's leading currencies and quite strong. The AUD seems to follow the rule quite nicely and typically makes a major move (either up or down) at around 10 AM EST. This is for a "normal" trading day. What is considered normal? A normal trading day is one in which there are no major economic reports at 10 AM. If there are then typically the AUD will make a move prior to 10 AM EST. Given that today we have Pending Home Sales at 10 AM, we believe the AUD will make a move (either long or short) prior to that time; probably around 9 AM EST. Time will tell if we are correct in this regard and as usual we'll have to monitor and see.
On Friday we said our bias was to the upside as the USD was trading lower and Gold (at the time) was trading higher. After a seesaw session whereby the markets moved in and out of positive territory all day, the rules of market did prevail and the Dow, Nasdaq and S&P closed higher although fractionally. Today we are not dealing with a correlated market however our bias is to the upside. Why? The USD is trading lower and Gold is trading higher. Europe is currently trading higher and we think there may be follow thru for the US session. Could this change? Of Course. Remember anything can happen in a volatile market.
Many of my readers have been asking me to spell out the rules of Market Correlation. Today Futures Magazine has elected to print a story on the subject matter and I must say I'm proud of the fact that they did as I'm Author of that article. I encourage all viewers to read that piece as it spells out the rules of market correlation and provides charts that show how it works in action. The article is entitled "How to Exploit and Profit from Market Correlation" and can be viewed at:
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 our bias is to the upside. Could this change? Of course. In a volatile market anything can happen. We'll have to monitor and see.
In May, I spoke with John Karnas, CEO of Trend Following Trades. John has an interesting background as he was a trader for a number of years prior to buying Trend Following Trades. John is a believer in Trading Plans and has a very precise method of developing aspiring traders. To download the article I've written, go to:
My discussion with John can be viewed at: http://youtu.be/uVwHpMq1604
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 declining. This is not 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 Friday September crude dropped to a low of 103.90 a barrel and held. We'll have to monitor and see if crude either goes lower or holds at the present level. It would appear at the present time that crude has support at $104 a barrel and resistance at 108. 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.
- Budget Battle - ongoing.
- Debt Ceiling in the August time frame.
- Asian Contagion - happening now
Crude oil is trading lower and the US Dollar is declining. This is not 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 when 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 editions.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.