The Morning After

Good Morning Traders,

As of this writing 5:35 AM EST, here’s what we see:

US Dollar: Up at 81.525, the US Dollar is up 9 ticks and is trading at 81.525.
Energies: September Crude is down at 99.39.
Financials: The Sept 30 year bond is up 6 ticks and trading at 137.22.
Indices: The Sept S&P 500 emini ES contract is down 56 ticks and trading at 1951.00.
Gold: The August gold contract is trading up at 1295.00 and is up 1 tick from its close.

Initial Conclusion

This is not correlated market. The dollar is up+ and oil is down- which is 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 up which is correlated. Gold is trading higher which is not 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.

Asia traded mixed with half the exchanges trading lower and the other half higher. As of this writing all of Europe is trading lower.

Possible Challenges To Traders Today

1. Challenger Job Cuts y/y are out at 7:30 AM EST. This is major.

2. Unemployment Claims are out at 8:30 AM EST. This is major.

3. Employment Cost Index q/q is out at 8:30 AM EST. This is not major.

4. Chicago PMI is out at 9:45 AM EST. This is major.

5. Natural Gas Storage is out at 10:30 AM EST. This could move the Nat Gas market.

Currencies

Yesterday the Swiss Franc made it’s move at 8:30 AM EST immediately after the GDP numbers were released. The USD hit a low at around that time and the Swiss Franc hit a high. If you look at the charts below the USD gave a signal at 8:30 AM EST, while the Swiss Franc also gave a signal at just about the same time. Look at the charts below and you’ll see a pattern for both assets. The USD hit a low at 8:30 AM EST and the Swiss Franc hit a high. I’ve changed the charts to reflect a 5 minute time frame and added a Darvas Box to make it more clear. This represented a shorting opportunity on the Swiss Franc, as a trader you could have easily netted 20 plus ticks on this trade. Remember each tick on the Swiss Franc is equal to $12.50 versus $10.00 that we usually see for currencies.

Charts Courtesy of Trend Following Trades built on a NinjaTrader platform

Bias

Yesterday we said our bias was neutral as it was FOMC Day and hence our bias is always neutral. The Dow dropped 32 points and the S&P showed no gain with the Nasdaq up 20 points. Today we are dealing with a nearly correlated market, however it is correlated to the downside. Hence our bias is to the downside.

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

Commentary

Yesterday morning it appeared as though the Dow would open higher after the GDP numbers were released at 8:30 AM EST. This however was a short lived phenomena as the Dow drifted downward after 10 AM but rose briefly after the FOMC announcement. But again this was short lived as the Dow closed down 32 points. With no news conference to clarify what was said in the announcement the markets had to interpret for itself. When reading the official text I had to admit it was quite confusing. It seems as though the economy is getting better but long term unemployment is still a drag. It also sounds like the Fed is cutting back on tapering as starting in August is will buy mortgage backed securities at a rate of $10 Billion a month versus $15 Billion prior. It also sounds like it will be doing the same with Treasury securities buying a rate of $15 Billion versus $20 Billion prior. The good news is the language didn’t seem to change much in terms of interest rate hikes and we didn’t think it would. The Fed is not going to pull the plug prematurely as if this economy has a downturn they won’t want to be accused of doing so prematurely. They’re going to take their time and do so when the U6 rate starts to drift lower and that isn’t happening right now. The reason? The lack of living wage jobs. Let’s face it folks, no one works for a minimum wage job and experienced personnel know all too well that a real, full time job requires a lot more than 40 hours a week. The challenge to the Fed is going to be how to create those jobs because employers aren’t too keen on paying higher wages. But as in all things time will tell how it all works out…

We knew yesterday that the markets would go in any direction, not because of the economic reports but because our rules of market correlation told us so.