Empire State Doesn’t Elevate Markets

Good Morning Traders,

As of this writing 4:20 AM EST, here’s what we see:

US Dollar: Dec. USD is Down at 97.680.
Energies: December Crude is Up at 50.85.
Financials: The Dec 30 year bond is Down 1 tick and trading at 163.29.
Indices: The December S&P 500 emini ES contract is 43 ticks higher and trading at 2133.75.
Gold: The December gold contract is trading Up at 1262.70. Gold is 61 ticks higher than its close.

Initial Conclusion

This is not a correlated market. The dollar is Down- and crude is Up+ which is normal but the 30 year bond is trading Down. 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 Up which is not 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.

All of Asia traded higher. As of this writing all of Europe is trading higher.

Possible Challenges To Traders Today

– CPI is out at 8:30 AM. This is major.

– Core CPI 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.

Treasuries

We’ve elected to switch gears a bit and show correlation between the 30 year bond (ZB) 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 the ZB made it’s move at around 10 AM EST when most of the economic news was reported. The ZB hit a low at around that time and the YM hit a high. If you look at the charts below ZB gave a signal at around 10 AM EST and the YM was moving lower at the same time. Look at the charts below and you’ll see a pattern for both assets. ZB hit a low at around 10 AM EST and the YM hit a high. These charts represent the latest version of Trend Following Trades and I’ve changed the timeframe to a 30 minute chart to display better. This represented a long opportunity on the 30 year bond, as a trader you could have netted about 20 plus ticks per contract on this trade. Each tick is worth $31.25. 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 Crude, the Bonds and Gold were all trading down yesterday morning and whereas this should be construed as positive for the indices; they were moving lower yesterday morning. The Dow dropped 52 points and the other indices lost ground as well. Today we aren’t dealing with a correlated market and our bias is to the upside.

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

Commentary

Yesterday the Empire State Manufacturing Index was released at 8:30 AM EST and no sooner was it released when the markets fell and remained in negative territory for most of the trading session. This does not bode well for the markets as the manufacturing index represents manufacturing activity in various portions of the United States. If this is down it means manufacturing is down as well. The Fed should take note of this but no doubt will be more focused on CPI and Core CPI today as those are their main ingredients for rate hikes.