Day After Yellen Does the Trick

Good Morning Traders,

As of this writing 4:45 AM EST, here’s what we see:

US Dollar: Up at 96.500 the US Dollar is up 518 ticks and trading at 96.500.
Energies: March Crude is up at 30.33.
Financials: The Mar 30 year bond is down 33 ticks and trading at 165.14.
Indices: The Mar S&P 500 emini ES contract is up 114 ticks and trading at 1886.75.
Gold: The Feb gold contract is trading down at 1206.00. Gold is 334 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.

Asia traded mainly higher with the exception of the Indian Sensex exchange which traded lower. As this writing all of Europe is trading higher with the exception of the Milan exchange which is trading lower.

Possible Challenges To Traders Today

- Empire State Manufacturing Index is out at 8:30 AM EST. This is major.

- NAHB Housing Market Index is out at 10 AM EST. This is major.

- TIC Long-Term Purchases is out at 4 PM EST. This is not major.

Currencies

Last Friday the Swiss Franc made it’s move at around 9:35 AM EST before the 10 AM economic news was reported. 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 9:35 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 9:35 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

Last Friday we gave the markets an upside bias by simply following our rules of Market Correlation. Gold and the Bonds were both trading lower and usually that bodes well for an upside day. 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

So the day after Janet Yellen speaks the whole world goes crazy and decides to go higher. The Dow closed up 314 points and the other indices traded higher as well. From our perspective the only thing we did was to follow our rules of market correlation and subscribers to this newsletter knew our bias at 5 AM EST. So why did this occur? We think the markets got tired of hearing the Fed come up with the most ridiculous excuses for raising rate prematurely and then not “fess up” and admit they made a mistake. The whole world is lowering rates and the Fed is hiking. In the meantime GDP has increased around 2.5 – 3% annually and inflation is no where to be seen. In fact crude oil retreated on Wednesday and Thursday while Yellen was speaking. I hope this serves as a wake-up call to the Fed that they need to be cognizant of what’s going on around them. Hopefully they won’t make this mistake again…..