Yellen Talk Soothes Markets…for now

Good Morning Traders,

As of this writing 4:40 AM EST, here's what we see:

US Dollar: Up at 95.780. The US Dollar is up 280 ticks and trading at 95.780.
Energies: July Crude is up at 49.46.
Financials: The June 30 year bond is down 23 ticks and trading at 163.19.
Indices: The June S&P 500 emini ES contract is up 1 tick and trading at 2097.50.
Gold: The June gold contract is trading down at 1210.70. Gold is 31 ticks lower than its close.

Initial Conclusion

This is not 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 fractionally 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 Sensex exchange which traded lower. As of this writing all of Europe is trading lower.

Possible Challenges To Traders Today

– Core PCE Price Index m/m is out at 8:30 AM EST. This is major.

– Personal Spending m/m is out at 8:30 AM EST. This is major.

– Personal Income m/m is out at 8:30 AM EST. This is major.

– S&P/CS Composite-20 HPI y/y is out at 9 AM EST. This is major.

– Chicago PMI is out at 9:45 AM EST. This is major.

– CB Consumer Confidence 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.

Last Friday Gold made it's move at around 11:15 AM EST after the economic news was reported and prior to Janet Yellen speaking. 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 11:15 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 11:15 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 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

Last Friday we gave the markets a neutral bias as the futures didn't seem to have any sense of direction. The Dow gained 45 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

So lo and behold Janet Yellen finally spoke last Friday and wouldn't you know it she spoke about rate hikes. She said that in all probability the Fed will raise rates in the "months ahead"; of course she didn't specify which month. This was all due to the Preliminary GDP numbers that came out on Friday and showed a gain of 0.8 percent or a 3.2% annual gain. In our humble opinion this isn't boom territory as a 5 percent annualized gain would be more appropriate. But at this point the markets liked what they heard because she didn't say the Fed would be raising next month (although they could, of course). We don't think the Fed will raise next month either as we think they'd be more inclined to do so in September following the summer season. Consumers spend in the summer months (vacations, clothing, auto's) and the Fed would be wise to keep this in mind as the last thing they'll want to do is torpedo consumer spending. But as we say everyday anything can happen in a volatile market.