Pompeii Day Doesn't Erupt Markets

Good Morning Traders,

As of this writing 4:10 AM EST, here’s what we see:

US Dollar: Up at 93.835 the US Dollar is up 479 ticks and trading at 93.835.

Energies: October Crude is up at 39.00.

Financials: The Sept 30 year bond is down 53 ticks and trading at 159.07.
Indices: The Sept S&P 500 emini ES contract is up 223 ticks and trading at 1927.00.

Gold: The October gold contract is trading down at 1148.70. Gold is 44 ticks lower than its close.

Initial Conclusion

This is not a correlated market. The dollar is up+ and oil is up+ which is not normal but 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 down 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 mixed with about half the exchanges lower and the other half higher. As of this writing all of Europe is trading higher.

Possible Challenges To Traders Today

- HPI is out at 9 AM EST. This is major.

- S&P/CS Composite-20 HPI y/y is out at 9 AM EST. This is major.

- Flash Services PMI is out at 9:45 AM EST. This is major.

- CB Consumer Confidence is out at 10 AM EST. This is major.

- New Home Sales is out at 10 AM EST. This is major.

- Richmond Manufacturing Index is out at 10 AM EST. This is major.

Currencies

Yesterday the Swiss Franc made it’s move around 9:55 AM EST with no 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 9:55 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 around 9:55 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 long 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 to the downside and unfortunately we were right as the Dow lost 589 points and the other indices fell as well. 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

I grew up with guys whose names were Bruno, Marcello, Fabrizio and no they weren’t Italian-American as they weren’t born in the United States but rather came from the mother country in Europe. I hung out with them because I’m 1st generation in the United States and my father was born in the mother country. Needless to say August 24th is an informal day of remembrance in Italy as that was the day that Mt Vesuvius erupted and destroyed the city of Pompeii. So now we have a market that not erupting to the upside but is being buried in fear and misinformation. Within 6 minutes of its open yesterday the Dow dropped over 1,000 points and of course regained some of it during the session but in two trading days the Dow dropped over 1,000 points. We haven’t witnessed anything like this since 2008 and it’s all being driven by fear. Fear that the Fed may hike prematurely, fear that China is slowing down and therefore the global market must be slowing. Let’s put that to bed right now. China may be slowing. Why? Many manufacturers have come to realize that making goods in China may have been wise in 2008 but Chinese quality has a long way to go to be competitive with Japan or Korea. Many of those firms have brought back their manufacturing. The Fed raising rates prematurely is a real concern but we’re not clear that they will do so as Barclays Capital has stated yesterday that in their estimation the 1st rate hike should be March, 2016. Whether this happens is yet to be seen but we’ll provide the insight as best we can.