Awaiting Yellen

Good Morning Traders,

As of this writing 4:25 AM EST, here’s what we see:

US Dollar: Up at 96.185 the US Dollar is up 91 ticks and trading at 96.185.
Energies: March Crude is up at 26.68.
Financials: The Mar 30 year bond is down 19 ticks and trading at 165.17.
Indices: The Mar S&P 500 emini ES contract is up 55 ticks and trading at 1862.00.
Gold: The Feb gold contract is trading down at 1184.70. Gold is 139 ticks lower than its close.

Initial Conclusion

This is 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.

All of Asia traded mainly lower with the exception of the Hang Seng which traded higher. As this writing all of Europe is trading higher.

Possible Challenges To Traders Today

- Fed Chair Yellen Testifies at 10 AM EST. This is major.

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

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

- Federal Budget Balance is out at 2 PM EST. This could affect afternoon trading.

Currencies

Yesterday the Swiss Franc made it’s move at around 9:45 AM EST before teh Jolts Job Numbers came out. 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 9:45 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 9:45 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 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 an upside bias as the Bonds and Gold were both trading lower and usually this is indicative of an upside bias. The markets however had other ideas as the Dow dropped 13 points and the other indices lost ground as well. Today we aren’t dealing with a correlated market and our bias is to the upside.

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

Commentary

I suppose it was only to be expected that the markets would flip flop and waffle between positive and negative territory yesterday as the whole world is waiting for Janet Yellen’s testimony before a Congressional committee today. I have no doubt that the pundits and analysts will be hanging on to every syllable she says today. All are looking for some clues as to what the Fed will do next. The Jolts Job Opening came in strong yesterday with 5.61 reported versus 5.41 expected. No doubt this will come up in today’s session. One thing to bear in mind however is that Job Opening like Non-Farm Payrolls are lagging indicators, not leading ones and historically speaking the street has always gotten wrong. Secondly, the people asking the questions today are in my mind not even remotely qualified to ask those questions as they know nothing about markets, finance or banking institutions. They are all doing this for posturing and to prove to their constituents that “hey, I’m looking after you” which in fact they aren’t.

An interesting point will be if the Fed admits they made a mistake by hiking rates in December. Of course, this is pure speculation but it would be interesting nonetheless.