Dead Cat Bounce??

Good Morning Traders,

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

US Dollar: Up at 97.840 the US Dollar is up 414 ticks and trading at .97.840.
Energies: January Crude is up at 37.20.
Financials: The Mar 30 year bond is down 11 ticks and trading at 155.04.
Indices: The Dec S&P 500 emini ES contract is up 28 ticks and trading at 2049.00.
Gold: The Feb gold contract is trading down at 1072.80. Gold is 37 ticks lower than its close.

Initial Conclusion

This is a not a correlated market. The dollar is up+ and crude 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 higher 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 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

- Unemployment claims are out at 8:30 AM EST. This is major.

- Import Prices are out at 8:30 AM EST. This is not major.

- Nat Gas Storage is out at 10:30 AM EST. This could move Nat Gas markets.

- 30-y Bond Auction starts at 1 PM EST. This is major.

- Federal Budget Balance is out at 3 PM EST. This is major.

Currencies

Yesterday the Swiss Franc made it’s move at around 9 AM EST with no real economic news in sight. 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 9 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 around 9:45 AM EST and the Swiss Franc hit a high. 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 the $10.00 that we usually see for currencies.

Charts Courtesy of Trend Following Trades built on a NinjaTrader platform

Bias

Yesterday we gave the markets a downside bias as Crude and the Bonds were both trading higher and this is usually a signal for a downside day. The Dow dropped 76 points and the other indices lost ground as well. Today we aren’t dealing with a correlated market and our bias is neutral. For those of you who are new to us, a neutral bias means the markets could go in any direction.

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

Commentary

Yesterday we gave the markets a downside bias as both Crude and the Bonds were trading higher. All we were doing was following our rules of Market Correlation. The markets opened higher and our assumption was that after two down days perhaps the markets were ready to go higher. This isn’t as unusual as one might think as sooner or later short covering does enter the markets. Typically this is called a Dead Cat Bounce however in the afternoon the markets reversed course and continued it’s downward trend with no major economic news to steer it in any direction. Today we have Unemployment Claims which are typical, usual and customary for a Thursday and is considered a major market mover. Will that be the case today? Only time will tell…