The Stampede Continues…
Good Morning Traders,
As of this writing 4:10 AM EST, here’s what we see:
US Dollar: Sept. USD is Down at 91.730.
Energies: Oct Crude is Up at 48.27.
Financials: The Dec 30 year bond is Up 10 ticks and trading at 155.18.
Indices: The Sept S&P 500 emini ES contract is 17 ticks Lower and trading at 2490.00.
Gold: The Dec gold contract is trading Up at 1336.70. Gold is 40 ticks Higher than its close.
This is not a correlated market. The dollar is Down- and Crude is Up+ which is normal but 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 Crude is trading Up+ which is correlated. Gold is trading Down- which is not 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.
At this hour Asia is trading Mixed with half the exchanges Higher and the other half Lower. As of this writing all of Europe is trading Lower.
Possible Challenges To Traders Today
– PPI is out at 8:30 AM EST. This is major.
– Core PPI is out at 8:30 AM EST. This is major.
– Crude Oil Inventories is out at 10:30 AM EST. This is major.
-30-y Bond Auction starts at 1 PM EST. This is major.
–Federal Budget Balance is out at 2 PM EST. This is major.
We’ve elected to switch gears a bit and show correlation between the 30 year bond (ZB) and The YM futures contract. The YM contract is the DJIA and the purpose is to show reverse correlation between the two instruments. Remember it’s liken to a seesaw, when up goes up the other should go down and vice versa.
Yesterday the ZB made it’s move at around 10 AM EST with no economic news to report. The ZB hit a High at around that time and the YM hit a Low. If you look at the charts below ZB gave a signal at around 10 AM EST and the YM was moving Higher at the same time. Look at the charts below and you’ll see a pattern for both assets. ZB hit a High at around 10 AM and the YM hit a Low. These charts represent the newest version of Trend Following Trades and I’ve changed the timeframe to a 30 minute chart to display better. This represented a shorting opportunity on the 30 year bond, as a trader you could have netted about 15 plus ticks per contract on this trade. Each tick is worth $31.25. We added a Donchian Channel to the charts to show the signals more clearly. Please note that the front month for the ZB contract is now December, 2017.
Charts Courtesy of Trend Following Trades built on a NinjaTrader platform Click on an image to enlarge it.
|ZB – Dec, 2017 – 9/12/17|
|YM- Sept, 2017 – 9/12/17|
Yesterday we called for an Upside bias as both the Bonds and Gold were both trading Lower yesterday morning and this usually bodes well for an upside day. The markets didn’t disappoint as the Dow gained 61 points and the other indices gained ground as well. Today we aren’t dealing with a correlated market and our bias is to the Downside.
Could this change? Of Course. Remember anything can happen in a volatile market.
Today marked the second day of recovery for those effected by Hurricane Irma. More than 60% of Florida’s residents are without power at this time and it’s not yet known when power will be restored. Yet the markets rose for the second consecutive day. Why? Our theory is that this disaster will start an economic boom in terms of construction and consumer spending. Today we have PPI numbers out at 8:30 AM EST which will serve to tell us how producer prices are doing.
Just so you understand, Market Correlation is Market Direction. It attempts to determine the market direction for that day and it does so by using a unique set of tools. In fact TradersLog published an article on this subject that can be viewed at: http://www.traderslog.com/market-correlation-is-market-direction/
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.
As I write this the crude markets are Higher and the futures are trading Lower. This is normal. Crude and the markets are now reverse correlated such that when the markets are rising, crude drops and vice-versa. Yesterday October Crude dropped to a low of $47.99 a barrel. It would appear at the present time that crude has support at $47.43 a barrel and resistance at $49.38. This could change. We’ll have to monitor and see. Remember that crude is the only commodity that is reflected immediately at the gas pump. Please note that the front month for crude is now October. Last December and after two years OPEC finally decided to cut production but the price of crude is still tame (as of this writing). What they haven’t figured out yet is that the more countries like Canada and the US produce their own crude (by whatever means) the more crude prices will fall. The move by OPEC to cut production in an attempt to pump up prices is liken to “too little, too late” as the world doesn’t need their oil as much as they used to. Power equipment that used to need oil (Grass Trimmers, Lawn Mowers, Autos) now run on battery power and Canada and the United States are producing more of their own crude. As an update to this the non-OPEC countries have come to an agreement to unilaterally cut production across the board and this has served to temporarily raise crude prices. We’ll have to see if and how long this lasts…
If trading crude today consider doing so after 10:30 AM EST when the inventory numbers come out and the markets gives us better direction.
Crude Oil Is Trading Higher
Crude oil is trading Higher and the markets are Lower. This is normal. Crude typically makes 3 major moves (long or short) during the course of any trading day: around 9 AM EST, 11 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. 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 daily newsletter that is dedicated to your trading success. We teach and discuss 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.