NAHB Doesn't Taboo Markets

Good Morning Traders,

As of this writing 4:30 AM EST, here’s what we see:

US Dollar:Down at 94.385 the US Dollar is down 75 ticks and trading at 94.385.

Energies: May Crude is up at 41.40.

Financials: The June 30 year bond is down 9 ticks and trading at 165.03.
Indices: The June S&P 500 emini ES contract is up 32 ticks and trading at 2094.75.

Gold: The June gold contract is trading up at 1244.10. Gold is 91 ticks higher than its close.

Initial Conclusion

This is not a correlated market. The dollar is down- and crude is up+ which is normal and 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 up which is 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 higher with some exchanges trading in positive triple digit territory. As of this writing all of Europe is trading higher.

Possible Challenges To Traders Today

- Building Permits is out at 8:30 AM EST. This is major.

- Housing Starts is out at 8:30 AM EST. 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.

Yesterday Gold made it’s move at around 9 AM EST before the NAHB numbers came out. The YM hit a low at around that time and Gold hit a high. If you look at the charts below the YM gave a signal at around 9 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 low at around 9 AM EST and Gold hit a high. 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 shorting opportunity on Gold, as a trader you could have netted about 30 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

Yesterday we gave the markets an downside bias as the USD, Bonds and Gold were all trading higher and this does not bode well for an upside day. The markets however had other ideas as the Dow gained 107 points and the other indices gained ground as well. 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

The NAHB (pronounced naboo) numbers came out at 10 AM yesterday that did not meet expectation. One would have thought the markets would drop based on this as this was the only real major economic report out yesterday. However that didn’t occur as the markets drove higher. Why? Could it be that the Smart Money didn’t want two losing days in a row? After all the markets did drop on Friday. But as we say each day in this newsletter, this can change…