Markets Take a U Turn

Markets Take a U Turn

Good Morning Traders,

As of this writing 5:10 AM EST, heres what we see:

US Dollar: Dec USD is Down at 98.500.

Energies: Nov '19 Crude is Up at 52.61.

Financials: The Dec 30 year bond is Up 5 ticks and trading at 163.23.

Indices: The Dec S&P 500 emini ES contract is 8 ticks Lower and trading at 2917.00.

Gold: The Dec Gold contract is trading Down at 1512.60. Gold is 2 ticks Lower than its close.

Initial Conclusion

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 S&P is Lower and Crude is trading Higher which is correlated. Gold is trading Lower 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 time Asia is trading mainly Higher with the exception of the Indian Sensex and Singapore exchanges which are Lower. Currently all of Europe is trading mainly Higher with the exception of the Milan exchange which is fractionally Lower.

Possible Challenges To Traders Today

  • CPI is out at 8:30 AM EST. This is major.
  • Core CPI is out at 8:30 AM EST. This is major.
  • Unemployment Claims are out at 8:30 AM EST. This is major.
  • Nat Gas Storage is out at 10:30 AM EST. This is major.
  • 30-y Bond Auction starts at 1 PM. This is major.

Treasuries

We've elected to switch gears a bit and show correlation between the 30 year bond (ZB) and The S&P futures contract. The S&P contract is the Standard and Poor's 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 a major move at around 8 AM EST. The ZB hit a High at around that time and the S&P hit a Low. If you look at the charts below ZB gave a signal at around 8 AM EST and the S&P 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 8 AM and the S&P was moving Higher at the same time. These charts represent the newest version of MultiCharts and I've changed the timeframe to a 15 minute chart to display better. This represented a Shorting opportunity on the 30 year bond, as a trader you could have netted about 20 ticks per contract on this trade. Each tick is worth $31.25. Please note: the front month for the ZB is now December. The S&P contract is now at December as well and I've changed the format to Renko bars such that it may be more apparent and visible.

Charts Courtesy of MultiCharts built on an AMP platform Click on an image to enlarge it.

ZB - December, 2019 - 10/9/19
S&P December 2019- 10/9/19

Bias

Yesterday we gave the markets an Upside bias as both the USD and the bonds were trading Lower Wednesday morning and this usually bodes well for an Upside day. The Dow gained 182 points and the other indices gained ground as well. Today we aren't dealing with a correlated market and our bias is Neutral.

Could this change? Of Course. Remember anything can happen in a volatile market.

Commentary

So yesterday we predict an Upside day and the markets gained ground. Why? Because it was correlated to do so. The indices were Higher in the morning and both the USD and the Bonds were trading Lower, a good indication for an Upside day. The markets didn't disappoint as the Dow gained 182 points and the other indices gained ground as well.

On Thursday, April 5th (of last year) we had the honor and privilege to be interviewed by David Lincoln on his You Tube channel. David is a floor trader for the options markets. If you listen to this interview, you will enjoy it. To view the interview go to:

ttps://youtu.be/U7gh9oanjIE

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 Neutral. 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 S&P is 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 Nov crude dropped to a low of $51.40. It would appear at the present time that crude has support at $52.00 a barrel and resistance at $54.00. 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 November. Both Russia and Saudi Arabia have agreed to keep production cuts in place for the next 6 - 9 months. This will artificially increase the price of crude at the pump by keeping supply low.

If trading crude today consider doing so after 10 AM EST when the markets give us better direction.

Crude Oil Is Trading Higher

Crude oil is trading Higher and the S&P is 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. To fully capitalize on this newsletter it is important that the reader understand how the various markets 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.