Existing Home Sales Deflates Markets

Good Morning Traders,

As of this writing 4:05 AM EST, here’s what we see:

US Dollar: Down at 84.735, the US Dollar is down 128 ticks and is trading at 84.735.
Energies: November Crude is up at 91.02.
Financials: The Dec 30 year bond is up 10 ticks and trading at 137.02.
Indices: The Dec S&P 500 emini ES contract is down 17 ticks and trading at 1982.00.
Gold: The October gold contract is trading up at 1217.03 and is up 5 ticks from its close.

Initial Conclusion

This is not a correlated market. The dollar is down- and oil 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 the US dollar is trading down which is not correlated. Gold is trading higher which is 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.

All of Asia traded mainly lower with the exception of the Shanghai exchange which traded fractionally higher. As of this writing all of Europe is trading lower.

Possible Challenges To Traders Today

HPI m/m is out at 9 AM EST. This is major.
FOMC Member Powell Speaks at 9:20 AM EST. This is major.
Flash Manufacturing PMI is out at 9:45 AM EST. This is major.
Richmond Manufacturing Index is out at 10 AM EST. This is major.
FOMC Member Kocherlakota Speaks at 2 PM EST. This is major.

Currencies

Yesterday the Swiss Franc made it’s move at around 10:20 AM EST after the Existing Home Sales numbers came out. 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 around 10:20 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 10:20 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 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. Please note that the front month for both instruments is now December.

Charts Courtesy of Trend Following Trades built on a NinjaTrader platform

Bias

Yesterday we said our bias was to the downside. The Dow dropped 107 points and the other indices lost 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.

Commentary

Yesterday we said our bias was to the downside as crude was trading lower, the bonds were trading higher; both Europe and Asia traded lower. As such the Dow lost 107 points and the other indices lost ground as well. Existing Home Sales for August came in much lower than expected (5.05m versus 5.21). This did not help the markets much and even Alibaba couldn’t save the day as it too fell to close at $89.09. This should only be expected after an IPO as traders will seek to take profits as quickly as possible. One of the chief concerns that the Fed has is the housing market and yesterday’s number should serve to confirm that fear. The Fed knows all too well that if they hike rates prematurely the housing market will fall and drag every other sector with it. Housing affects so many different industries that when it drops, other sectors will follow. Today we have HPI which will also serve to determine which direction the Fed may go. Just remember that the Fed will serve as the scapegoat if this economy takes a dip. They will want the American people to know that they did all they could by keeping the overnight rate as low as possible.

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