Nick Mastrandrea
Market Tea Leaves
Good Morning Traders,
As of this writing 4:50 AM EST, here’s what we see:
US Dollar: Up at 94.815, the US Dollar is up 88 ticks and is trading at 94.815.
Energies: March Crude is up at 44.49.
Financials: The Mar 30 year bond is down 11 ticks and trading at 150.27.
Indices: The Mar S&P 500 emini ES contract is up 12 ticks and trading at 1994.50.
Gold: The February gold contract is trading down at 1271.40 and is down 145 ticks from its close.
Initial Conclusion
This is not a correlated market. The dollar is up+ and oil is up+ which is not normal and 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 up and Crude is trading up which is not correlated. Gold is trading lower 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 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 mainly to the downside with the exception of the Sensex exchange which is trading higher. As of this writing all Europe is trading lower.
Possible Challenges To Traders Today
Unemployment Claims are out at 8:30 AM EST. This is major.
Pending Home Sales m/m is out at 10 AM EST. This is major.
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 around 10 AM EST with no real economic news in sight. 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 10 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 10 AM EST and the Swiss Franc hit a low. These charts represent the latest version of Trend Following Trades and I’ve changed the timeframe to a Renko chart to display better. This represented a shorting opportunity on the Swiss Franc, as a trader you could have netted 20 plus ticks on this trade. We added a Donchian Channel to the charts to show the signals more clearly. 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 we always keep a neutral bias on that day. The Dow dropped 196 points and the other indices lost ground despite Apple’s earnings. 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
So yesterday we had the FOMC announcement and apparently the markets went all over the place. First it opened higher then dropped, then went higher and finally after 2 PM EST it dropped 196 points. So you might be asking “what happened”? I know you said a neutral bias but isn’t this a little ridiculous? The answer is “no” it’s not that ridiculous which is why we call a neutral bias. It means the market could go in any direction and yesterday they did. So what was it that traders didn’t like? The Fed didn’t raise the FFR (Federal Funds Rates aka the Overnight rate). This is the rate that they the Fed charges banks for capital who in turn charges us to borrow. What traders didn’t like was the Fed’s tone of their announcement, strengthening their bullish stance with no hint of backing down. Let’s face it folks, people today aren’t naive or foolish. They know that Japan’s in a recession, Europe appears to heading towards one and even China has cooled down somewhat. This begs to ask the question why is the Fed so apparently adamant about heading towards a rate hike? It would seem to us that the Fed must know that most people’s income isn’t being elevated and that in essence they have very little bargaining or buying power. If rates start to rise, the Fed should ponder the impact on consumer spending in the US. The aspect that helped during the Great Recession was low interest rates; without which consumer spending would have froze. Could there be a political reason?
Trading performance displayed herein is hypothetical. The following Commodity Futures Trading Commission (CFTC) disclaimer should be noted.
Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown.
In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance trading results is that they are generally prepared with the benefit of hindsight.
In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results.
There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.
Trading in the commodities markets involves substantial risk and YOU CAN LOSE A LOT OF MONEY, and thus is not appropriate for everyone. You should carefully consider your financial condition before trading in these markets, and only risk capital should be used.
In addition, these markets are often liquid, making it difficult to execute orders at desired prices. Also, during periods of extreme volatility, trading in these markets may be halted due to so-called “circuit breakers” put in place by the CME to alleviate such volatility. In the event of a trading halt, it may be difficult or impossible to exit a losing position.
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