USD Divergence

Good Morning Traders,

As of this writing 5:05 AM EST, here’s what we see:

US Dollar: Down at 88.365, the US Dollar is down 50 ticks and is trading at 88.365.
Energies: January Crude is up at 76.19
Financials: The Dec 30 year bond is down 6 ticks and trading at 141.26.
Indices: The Dec S&P 500 emini ES contract is up 13 ticks and trading at 2065.00.
Gold: The December gold contract is trading down at 1195.90 and is down 19 ticks from its close.

Initial Conclusion

This is not a correlated market. The dollar is down- and oil is up+ which is normal and the 30 year bond is trading down. 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 up and Crude is trading up which is not 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.

All of Asia traded to the upside with the exception of Singapore which traded down fractionally. Please note that the Japanese Nikkei exchange was closed for a holiday. As of this writing all of Europe is trading higher with the exception of the London exchange which is down fractionally.

Possible Challenges To Traders Today

1. Flash Services PMI is out at 9:45 AM EST. This is not major.

2. Lack of economic news.

Currencies

On Friday the Swiss Franc made it’s move at around 9:15 AM EST with no economic news in sight for the US markets. The USD hit a high at around that time and the Swiss Franc hit a low. If you look at the charts below the USD gave a signal at around 9:15 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 high at 9:15 AM EST and the Swiss Franc hit a low. 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 long 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.

Charts Courtesy of Trend Following Trades built on a Ninja Trader platform

Bias

On Friday we said our bias was neutral as all the futures were pointed higher. A neutral bias means the markets could go in any direction. All the indices closed higher with the Dow hitting all time highs. Today we aren’t 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.

Commentary

On Friday our bias was neutral as all the instruments we track were pointed higher. When all futures are either pointed higher or lower, it means the markets have no sense of direction and can go either higher or lower. Hence the neutral bias. But let’s take a closer look at what happened Friday. Pre-market Mario Draghi makes a speech stating that the ECB will do whatever it takes to prevent deflation from hitting the Eurozone. So what happens? The Euro drops and the US dollar rises as it must. Now typically when that happens the markets drop. That didn’t happen yesterday as we witnessed a divergence from normal behavior. The US dollar did go higher but the markets didn’t drop, they went higher. Why? The Smart Money was intent on driving the markets higher no matter what. Remember that next week we have a shortened week as the markets are closed on Thursday and Friday we’ll see an abbreviated session.