Nick Mastrandrea
Market Tea Leaves
Good Morning Traders,
As of this writing 4:20 AM EST, here’s what we see:
US Dollar: Up at 94.305 the US Dollar is up 53 ticks and trading at 94.305.
Energies: May Crude is down at 39.48.
Financials: The June 30 year bond is up 7 ticks and trading at 166.13.
Indices: The June S&P 500 emini ES contract is up 16 ticks and trading at 2044.75.
Gold: The June gold contract is trading up at 1252.10. Gold is 83 ticks higher than its close.
Initial Conclusion
This is not a correlated market. The dollar is up+ and crude is down- which is normal and 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 up and Crude is trading lower which is correlated. Gold is trading up which is not 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 mixed with half the exchanges higher and the other half lower. As of this writing all of Europe is trading higher.
Possible Challenges To Traders Today
- Treasury Sec Lew Speaks at 8:30 AM EST. This is major.
- FOMC Member Dudley Speaks at 9:25 AM EST. This is major.
- Fed Announcement – Tentative. 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.
On Friday Gold made it’s move at 10:45 AM EST with no economic news in sight. 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 10:45 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 10:45 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 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
On Friday we gave the markets an upside bias as the Bonds and USD were all trading lower Friday morning and that usually bodes well for an upside day. The Dow gained 35 points and the other indices gained 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
Once again on Friday we simply followed our rules for Market Correlation to come up with an upside bias. Both the Bonds and USD were trading lower Friday morning and as per our rules that bodes well for a upside day. The markets didn’t disappoint as the Dow traded up by 35 points and the other indices gained as well. Today we have a Fed Announcement that can come up at any time during the trading day. The last time this happened was 2011 and I believe the Fed announced Operation Twist at that time. As we have no idea what the announcement I would urge caution as what we don’t can hurt us….
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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