FOMC Day

Good Morning Traders,

As of this writing 5:00 AM EST, here’s what we see:

US Dollar: Down at 94.325 the US Dollar is down 218 ticks and trading at 94.325.
Energies: June Crude is up at 44.87.
Financials: The June 30 year bond is up 9 ticks and trading at 161.16.
Indices: The June S&P 500 emini ES contract is down 13 ticks and trading at 2085.25.
Gold: The June gold contract is trading up at 1247.90. Gold is 45 ticks higher than its close.

Initial Conclusion

This is not a correlated market. The dollar is down- and crude 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 Crude is trading higher which is correlated. Gold is trading up 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.

Asia traded mainly lower with the exception of the Indian Sensex exchange which traded higher. As of this writing Europe is trading mixed with half the exchanges higher and the other half lower.

Possible Challenges To Traders Today

– Goods Trade Balance is out at 8:30 AM EST. This is major.

– Pending Home Sales m/m is out at 10 AM EST. This is major.

– Crude Oil Inventories is out at 10:30 AM EST. This is major.

– FOMC Statement is out at 2 PM EST. This is major.

– Federal Funds Rate is out at 2 PM EST. This is major.

Gold

We’ve elected to switch gears a bit and show correlation between Gold and The YM futures contract. The YM contract is the DJIA and the purpose is to show reverse correlation between the two instruments. Remember it’s liken to a seesaw, when up goes up the other should go down and vice versa.

Yesterday Gold made it’s move at around 8 AM EST prior to any economic news reported. The YM hit a high at around that time and Gold hit a low. If you look at the charts below the YM gave a signal at around 8 AM EST, while Gold 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 YM hit a high at around 8 AM EST and Gold hit a low. These charts represent the latest version of Trend Following Trades and I’ve changed the timeframe to a 15 minute chart to display better. This represented a long opportunity on Gold, as a trader you could have netted about 50 plus ticks per contract on this trade. Each tick is worth $10. We added a Donchian Channel to the charts to show the signals more clearly.

Charts Courtesy of Trend Following Trades built on a NinjaTrader platform

Bias

Yesterday we gave the markets an upside bias as the USD and Gold were both trading lower yesterday morning and usually this signals an upside day. The Dow gained 13 points, the S&P gained 4 and the Nasdaq dropped 8. Today given that it is FOMC Day our bias is neutral which means the markets could go in any direction today.

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

Commentary

Yesterday Consumer Confidence came out at 10 AM that did not meet expectation and based on that the markets fell. If you look at the following graph for the Dow it shows that after 10 AM EST yesterday the index dropped dramatically. However by the end of the session the Dow battled back to close 13 points higher.

Today we have FOMC at 2 PM this afternoon and for those of you who are new to Market Tea Leaves; there are two days in the month when we will always maintain a neutral bias: Jobs Friday and FOMC Day. Why? Because the markets have never shown any sense of normalcy on those days, hence the neutral bias. Do we think the Fed will raise today? No, but that doesn’t mean that they won’t. The good news today is the Fed isn’t holding a news conference which means nothing earth-shattering is in the works….