Downside Bias = Downside Day
Good Morning Traders,
As of this writing 4 AM EST, heres what we see:
US Dollar: Dec. USD is Up at 93.625.
Energies: Jan 18 Crude is Up at 56.12.
Financials: The Mar 30 year bond is Down 4 ticks and trading at 153.30.
Indices: The Dec S&P 500 emini ES contract is 10 ticks Higher and trading at 2631.75.
Gold: The Feb gold contract is trading Down at 1259.40. Gold is 66 ticks Lower than its close.
This is not a correlated market. The dollar is Up+ and Crude 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 Higher and Crude is trading Up+ which is not correlated. Gold is trading Down- 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 dont 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 mainly Higher with the exception of the Shanghai and Singapore exchanges which are Lower at this hour. As of this writing all of Europe is trading Higher.
Possible Challenges To Traders Today
- Challenger Job Cuts y/yis out at 7:30 AM EST. This is major.
- Unemployment Claimsis out at 8:30 AM EST. This is major.
- Natural Gas Storageis out at 10:30 AM EST. This is major.
- Consumer Credit m/m is out at 3 PM EST. This is major.
Weve 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 its liken to a seesaw, when up goes up the other should go down and vice versa.
Yesterday the ZB made its move at around 10 AM EST. 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 youll 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 Ive changed the timeframe to a 30 minute chart to display better. This represented a long opportunity on the 30 year bond, as a trader you could have netted about a dozen 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.
Charts Courtesy of Trend Following Trades built on a NinjaTrader platform Click on an image to enlarge it.
|ZB Dec, 2017 12/6/17|
|YM- Dec, 2017 12/6/17|
Yesterday we gave the markets a Downside bias as the Bonds and Gold were trading higher Wednesday morning and this usually bodes well for a downside day. The markets didnt disappoint as the Dow dropped 40 points, the S&P gained about a point but the Nasdaq gained about 14 points. Today we arent dealing with a correlated market however our bias is to the Upside.
Could this change? Of Course. Remember anything can happen in a volatile market.
The economic news reported yesterday was ok, not great or stellar mind you but ok. The problem with ok reports is the markets expect more and when they dont get it or see it, the markets falter. This is pretty much what happened yesterday. Now subscribers knew this after 4 AM yesterday morning when we release our latest edition. From our perspective all we did was to stick to our rules of market correlation. Today we have Challenger Jobs Cuts which may provide some insight on tomorrows Non Farm Payroll numbers, but as in all things time will tell.
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 dont trade equities. While were on this discussion, lets define what is meant by a good earnings report. A company must exceed their prior quarters earnings per share and must provide excellent forward guidance. Any falloff between earning per share or forward guidance will not bode well for the companys shares. This is one of the reasons I dont trade equities but prefer futures. There is no earnings reports with futures and we dont have to be concerned about lawsuits, scandals, malfeasance, etc. Anytime the market isnt correlated its giving you a clue that something isnt 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. Well have to monitor and see.
As I write this the crude markets are Higher and the futures are trading Higher. This is not normal. Crude and the markets are now reverse correlated such that when the markets are rising, crude drops and vice-versa. Yesterday January Crude dropped to a low of $55.90 a barrel. It would appear at the present time that crude has support at $55.00 a barrel and resistance at $58.27. This could change. Well 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 January. This past week OPEC met once again to cut production but the price of crude is still tame (as of this writing). What they havent 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 doesnt 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. Well have to see if and how long this lasts
If trading crude today consider doing so after 10 AM EST when the markets gives us better direction.
Crude Oil Is Trading Higher
Crude oil is trading Higher and the markets are Higher. This is not 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 todays market is crucial. We as traders are faced with numerous challenges that we didnt have a few short years ago. High Frequency Trading is one of them. Im 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 its 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, youll also receive our daily Market Bias video that is only available to subscribers.