Nick Mastrandrea
Market Tea Leaves
Good Morning Traders,
As of this writing 4:50 AM EST, here’s what we see:
US Dollar: Down at 98.955 the US Dollar is down 49 ticks and trading at 99.125.
Energies: March Crude is down at 28.13.
Financials: The Mar 30 year bond is up 9 ticks and trading at 160.23.
Indices: The Mar S&P 500 emini ES contract is down 48 ticks and trading at 1843.00.
Gold: The Feb gold contract is trading down at 1099.70. Gold is 65 ticks lower than its close.
Initial Conclusion
This is not a correlated market. The dollar is down- and crude is down- which is not 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 lower which is not correlated. Gold is trading down 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 lower. As this writing all of Europe is trading higher.
Possible Challenges To Traders Today
- Philly Fed Manufacturing Index is out at 8:30 AM EST. This is major.
- Unemployment Claims is out at 8:30 AM EST. This is major.
- Natural Gas Storage is out at 10:30 AM EST. This could move the Nat Gas market.
- Crude Oil Inventories are out at 11 AM EST. This could move the crude market.
Currencies
Yesterday the Swiss Franc made it’s move at around 10:30 AM EST with no 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 10:30 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 10:30 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 about 20 plus ticks per contract 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 both the Bonds and Gold were trading higher and this usually signals a downside day. The Dow dropped 249 points and the other indices lost ground as well. Today we aren’t dealing with a correlated market and our bias is neutral.
Could this change? Of Course. Remember anything can happen in a volatile market.
Commentary
Yesterday we gave the markets a downside bias as both the Bonds and Gold were trading higher and according to our rules of market correlation this signals a downside day. The markets didn’t disappoint as the Dow dropped 249 points and the other indices fell as well. The bigger question is what is causing this to occur and when will this stop? Here’s our theory on the subject:
- Many traders saw the Santa Claus rally in December and bought into the notion that this would continue in January. What they failed to realize is stocks generally gravitate to the upside in December such that it can be sold at a profit in January.
- The Fed is still adamant about rate hikes in 2016 despite this not being warranted. Case-in-point yesterday CPI came out at 0.1% versus 0.2% expected and this is nowhere near the 2% that the Fed has determined mandates a rate hike to combat inflation. As such there is no inflation to be seen.
Bottom line until the Fed decides to change their stance and language concerning interest rate hikes, this is what we’ll have to contend with going forward. No one expects a stellar earnings season and the real kicker is going to be when Auto Sales and Retail Sales are reported. It wouldn’t surprise me to see a downturn in Auto Sales.
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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