Market Overview

Pre-Market Global Review - 10/8/13 - Earnings Season Starts

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Good Morning Traders,
 

As of this writing 4:30 AM EST, here’s what we see:
 
US Dollar –Up at 80.140, the Dec US Dollar is up 114 ticks and is trading at 80.140.             
Energies – November Oil is up at 103.28.       
Financials – The December 30 year bond is down 2 ticks and is trading at 133.09.      
Indices – The December S&P 500 emini ES contract is up at 1668.00 and is up 1 tick.  
Gold – The December gold contract is trading down at 1323.00 and is down 21 ticks from its close.
 
Initial Conclusion: This is not a correlated market.  The dollar is up+ and oil is up+  which is not normal but the 30 year bond is trading lower.  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 fractionally and the US dollar is trading higher which is not correlated.  Gold is trading lower which is correlated 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 closed closed higher. As of this writing all of Europe is trading lower. 
 
  Possible challenges to traders today is the following:
                                                
1. 
NFIB Small Business Index is out at 7:30 AM EST.  This is not major.       
2. 
IBD/TIPP Economic Optimism is out at 10 AM EST. This is not major.
3.  Lack of Major economic news.         
 
     Currencies  
Yesterday the Swiss Franc made it's move at around 10:15 AM EST.  This was a long opportunity as the USD hit a high at around that time and proceeded to drop,  the Swiss Franc rose at the around the same time.  The key to capitalizing on these trades is to watch the USD movement.  The USD dropping only lent confirmation to the move.  As a trader you could have netted 20-30 ticks on this trade.  And you thought markets weren't correlated?  And this is with a government shutdown which means these rules will work regardless of what else is going on....

 

Chart Courtesy of Trend Following Trades
 

USD 10/7/13

Bias

Yesterday we said our bias was to the downside as the Bonds were trading higher, Asia closed lower and Europe was trading lower.  As such the  Dow lost 137 points and closed below the 15,000 level.  The other indices dropped as well.  Today awe are not dealing with a correlated market and as such our bias is to the downside.  Why?  The USD is trading higher and Gold is trading lower, whereas this may be good for a short position on Gold; it is not bullish for the markets.   Could this change? Of Course.  Remember anything can happen in a volatile market.

 

Today starts the unofficial beginning of earnings season with Alcoa reporting after hours.  Many pundits and analysts have already lamented on the number of firms who have already claimed a shortfall in earnings.  Some estimates are as high as 58 percent of all companies that have reported potential shortfalls.  Clearly this shutdown is having a dire effect on the markets as the kind of news that's being reported isn't considered to be major.  Without major economic news it's liken to a ship without a compass; you think you're heading in the right direction but you aren't quite sure.  And you wonder why the Fed didn't taper?  We should be grateful that they didn't or else we would be dealing with a far worse scenario.  The major event really wasn't the shutdown unto itself but what is and will be far worse is the debt ceiling.  If that isn't resolved the US government will have no money to pay for ordinary expenditures like Social Security.  If you look thru history and find countries that did not have capital to pay it's bills, you will also see a devaluation of that country's currency.  Someone once asked me what does that mean?  In short a dollar is worth ten cents.  For those readers who are Americans, this is not conceivable as it's never happen to the United States in over 200 hundred years but that's not to say that it couldn't.    I just wish these folks in DC would stop playing chicken with our economic future....
 

Many of my readers have been asking me to spell out the rules of Market Correlation.  Recently 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: 


http://www.futuresmag.com/2013/08/01/how-to-exploit-and-profit-from-market-correlation

As a follow up to the first article on Market Correlation, I've produced a second segment on this subject matter and Futures Magazine has elected to publish it.  It can be viewed at:

http://www.futuresmag.com/2013/08/16/how-to-exploit-and-profit-from-market-correlation?ref=hp

 
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 downside.  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: http://www.traderslog.com/john-karnas/
 
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 higher and the US Dollar is advancing.  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 November crude dropped to a low of 101.88 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 $102.02 a barrel and resistance at 103.78.  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:
- Budget Battle - ongoing.
- Debt Ceiling - ongoing.      
 

Crude oil is trading higher and the US Dollar is advancing.  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.
 

Nick Mastrandrea is the author of Market Tea Leaves. Market Tea Leaves is a free, daily newsletter that discuses and teaches market correlation. Market Tea Leaves is published daily, pre-market in the United States and can be viewed at www.markettealeaves.com  Interested in Market Correlation?  Want to learn more?  Signup and receive Market Tea Leaves each day prior to market open.  As a subscriber, you’ll also receive our daily Market Bias video that is only available to subscribers.

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: Futures Forex Pre-Market Outlook Markets

 

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