Neutral Bias = Seesaw Market

Good Morning Traders,

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

US Dollar: Up at 95.465. The US Dollar is up 249 ticks and trading at 95.465.

Energies: June Crude is down at 47.76.

Financials: The June 30 year bond is up 6 ticks and trading at 164.21.
Indices: The June S&P 500 emini ES contract is up 16 ticks and trading at 2049.25.

Gold: The June gold contract is trading down at 1243.60. Gold is 79 ticks lower 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 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 lower with the exception of the Sensex and Hang Seng exchanges which traded higher. As of this writing all of Europe is trading higher.

Possible Challenges To Traders Today

– New Home Sales are out at 10 AM EST. This is major.

– Richmond Manufacturing Index is out at 10 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 10 AM EST with no real economic news to speak of. 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 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 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 about 40 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 a neutral bias as the markets didn’t seem to have any sense of direction yesterday morning. The Dow closed 8 points lower and the other indices lost ground as well. Today we aren’t dealing with a correlated market and will maintain a neutral bias.

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

Commentary

Yesterday we gave the markets a neutral as the indices had no sense of direction yesterday morning. For those of you who are new to us, a neutral bias means the markets could go in any direction. The best course of action for such a day is to wait until all the economic news is reported (if any), judge market reaction accordingly and then decide. The news we had yesterday was Flash Manufacturing PMI which came in at 50.5 versus 51.0 expected. Today we have New Home Sales and this is major and always a market mover….

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